Lululemon Athletica Stock

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's second quarter earnings conference call. Joining me today are Meghan Frank, Interim Co-CEO and CFO; and Andre Maestrini, interim Co-CEO, President and Chief Commercial Officer.

Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of lululemon's future. These statements are based on current information, which we have assessed, but by which its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC including our annual report on Form 10-K and our quarterly reports on Form 10-Q.

Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in our earnings press release.

In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com. On today's call, Meghan and Andre will begin by discussing recent business developments across our regions and the plans and strategies we are implementing to drive improved performance. Meghan will then discuss our detailed Q2 financials, the impact recent trends are anticipated to have on our performance for the remainder of the year and our revised guidance outlook. And then the team will be happy to take your questions.

Before I turn the call over to Meghan, I'd like to remind investors to visit our investor site, where you'll find a summary of our key financial and operating statistics for the second quarter as well as our quarterly infographic. Meghan, over to you.

Thanks, Howard. Welcome, everyone, and thank you for joining us. I want to start the call by taking you through Q2 results. What we're seeing in the business today and how this is informing our decision to lower our guidance for the full year. Then Andre and I will spend most of our time discussing North America and China Mainland, what's happened since our last earnings call and the actions we are taking across these markets to improve the trajectory of the business.

As you recall, we began the year with an action plan focused on three pillars: Product creation, product activation and enterprise enablement. A key objective of our plan is to strengthen our full-price sales trajectory and position the company for long-term growth. In Q1, we saw some encouraging signs indicating we were moving in the right direction to strengthen performance in North America while continuing to expand our global growth engine. As we moved into Q2, we faced negative commentary in the media and social channels, which impacted traffic and softer than planned response to some new product launches, which contributed to a moderating sales trend. As you've seen from our press release, Q2 revenue came in below our expectations with the shortfall driven predominantly by China Mainland, where revenue grew 4%. North America finished down 8% for Q2, slightly ahead of our guidance.

As we move into Q3, while we are seeing good guest reaction to our activations and some of our newer styles, the overall response to our product launches remains inconsistent. And we've continued to see pressure on the brand in both of our largest markets. Based on our assessment of these current trends, we've updated our guidance for the remainder of the year. At the enterprise level, we have several key actions underway to improve our performance. Andre and I will get into the regional detail in a moment.

Our product teams are chasing into strong performers, including our Groove and Define styles more aggressively than in the past and working with vendors to strategically manage future inventory flows. On brand, we are moving forward with our increased marketing investments in the back half of the year. We're seeing strong community engagement with our recent campaigns and activations. And while we haven't yet seen an impact on the top line trajectory, we are encouraged by the response. And on expenses, we've been continuing to drive efficiency across the organization. Given current trends, we've heightened that focus in the back half of the year, while protecting investments in product and brand.

We're excited our incoming CEO, Heidi O'Neill, joins us next week. And we expect she will take a deep dive into the business, evaluating our strategy and current action plans. And we look forward to the fresh perspective she will bring to define the path forward for lululemon's next chapter. In the near term, our teams remain focused on execution.

As we look to the future, we remain confident in the underlying strength of lululemon's brand, the connection we have to our highly engaged community of guests and ambassadors and the equity we have built. We believe our greatest opportunity is to build on this foundation through continued investment in product innovation, reinforcing our premium positioning and the long-term brand health. At the same time, our strong financial position allows us to invest in near-term actions that support full price sales and top line improvement while remaining focused on the significant growth opportunities ahead.

I'll now share an update on our action plan and then hand it over to Andre to discuss regional performance. The markets we operate in are competitive, which makes it imperative for us to focus on unique and innovative ways to inspire our guests. As you know, we've been working on this through our action plan with a focus on product and brand. We anticipated our plan would take some time to gain traction as we bring in new innovations, elevate our store and digital experience and increase and redirect our marketing spend. But we expected a better response than we are seeing as we enter the second half of the year. So let me share some details starting with product.

As we stated on prior calls, a top priority for the management team is returning to full price sales growth as we focus on restoring and protecting our brand health for the long term. Despite the headwinds we are experiencing, we are moving forward with our actions in this area, which will include bringing updates to our core franchises, introducing new styles, overall SKU reductions and tightly managing inventory levels. In addition, we are leaning into our chase capabilities. As we discussed on prior calls, faster chase times allow us to read and react to guest demand and get back into certain strong-performing styles more quickly. We're chasing approximately 20% more volume this year relative to last year.

In Q2, while we're seeing green shoots in product, particularly within some of our newer away-from-body bottoms for women, we are also seeing an inconsistent performance in our assortment overall. This included a greater-than-expected slowdown in some of our core categories, particularly leggings. In women's tops, guests are responding well to Scuba and Steady State, now offered in our SuperLoft fabric and our Define franchise continues to perform well. In men's, we are seeing strength in Metal Vent Tech Tees and our golf tops. Supported by the storytelling campaigns we developed around some of our elite ambassadors, including Lewis Hamilton and Min Woo Lee. We're also pleased with the halo effect designed for golf tops are having on our ABC bottoms as they pair well together and provide guests with a versatile and technical solution on the golf course.

Let me now spend a moment on our women's bottoms business, where performance has been mixed. Leggings trends so far this year have been below our expectations with sales declining approximately 20% in Q2. While we have been planning into lower legging sales, and we are seeing good traction in several of our away from body styles, we are not yet able to fully offset these declines. Leggings remain an important category for us where we remain the market leader. The wellness trend is strong. We continue to be a leader in technical fabric development and guests continue to purchase our leggings for their exercise and training needs, particularly yoga and Pilates. We remain committed to the category, but there are shifts occurring with guests looking for away from body silhouettes. We're happy with the performance of several new away-from-body styles we've recently introduced, including the Groove Wide-Leg, the Align Foldover Jogger, the Breezily and our updated Dance Studio Pants. All are trending well, and we expect momentum to build in the back half of the year and into 2027.

As we look at the second half of the year, in addition to away-from-body bottoms, we'll continue to focus on new and updated styles across our activities. You'll see updates across run with new cold weather innovations in outerwear featuring Wunder Puff and our Featherweight Down franchise and a new version of our popular Big Cozy, to highlight just a few.

I also wanted to mention accessories where we experienced a 13% decline in Q2. While backpacks are strong, we are seeing overall softness in bags. In addition, we are strategically editing the overall accessories assortment to better align with our go-forward vision for the brand.

Moving now to product activations and marketing. We are working to strengthen brand relevance, desirability and demand by engaging more directly with guests through social channels and differentiated community experiences while using those platforms to tell richer stories about our brand, products and innovation. We held several successful events in Q2 and into Q3, and engagement levels are encouraging.

Let me highlight two. In June, we celebrated our foundation in yoga with a launch for summer series. We partnered with leading yoga, Pilates and sculpt instructors to bring free classes to tens of thousands of guests across 70 cities in the U.S. and Canada. More recently, in August, we brought back our SeaWheeze Half Marathon and Festival for the first time since 2019. The reaction from guests to the local community and across social media was outstanding. Nearly 10,000 runners from 24 countries ran the half marathon and approximately 14,000 attendees joined us for an evening of movement and music headlined by DJ John Summit. This event brought incredible energy to our hometown market of Vancouver and through our virtual SeaWheeze challenge on Strava, we extended participation well beyond race weekend with more than 85,000 participants from 120 countries around the world.

Based on the strong response, we already made the decision to bring back SeaWheeze again next summer. Guest engagement in events like this demonstrate the passion for our brand and the strength of our connections with the communities we serve. We are increasing our marketing investment in the back half of the year to drive improved brand heat, guest acquisition, traffic and overall top line performance. We are investing more heavily in mid-funnel, creator and social content to build relevance, engagement and product consideration. One recent example is our YouTube series featuring some of our elite athletes. We remain confident these investments will help to reignite our sales trends over time as we continue to elevate our product and marketing execution.

Let me now speak to our enterprise enablement and cost management initiatives. We've been reducing our expense base and working across the enterprise to operate as efficiently as possible. Given current top line trends and our expectations for the back half, we are taking an even more aggressive stance on expense management. Our ongoing initiatives continue, efficiencies across our supply chain and non-merchandise procurement and implementation of new technologies, including AI powered systems and automation.

On discretionary spending, we are driving new efficiencies across travel, professional fees, store labor hours and headcount growth moderation. On real estate, we continue to scrutinize every deal across all new store openings and optimizations. We're now planning approximately 35 net new store openings this year, down from our guidance of approximately 40 last quarter. And our plans call for a significant reduction in pop-up stores from 65 at the end of last year to approximately 40 by the end of 2026. We're being intentional with our cost management strategies and looking to drive enduring efficiencies beyond this year. We won't take steps that will negatively impact the brand or our long-term growth potential, but we recognize that current top line trends necessitate a smaller expense profile, and we are acting accordingly.

We know there is much more work to be done. Our management team leaders and employees are focused on serving our guests and executing initiatives to drive an inflection in our business.

Now let me turn it over to Andre to discuss regional performance in more detail. Andre?

Thanks, Meghan. It's good to be here with you today to discuss our results and the work underway across the business. While we are focused on improving the trajectory of the business in the short term, we are also making the appropriate decision to strengthen our foundation and drive more sustainable growth over the medium and long term. Let me provide more details about our regional performance beginning with North America. In Q2, revenue declined 8%, slightly ahead of our expectations. In the U.S., we saw a decrease of 8%, while in Canada, revenue was down 11% on a reported basis and down 9% on a constant currency basis.

Meghan already spoke to our global product and brand initiatives that we expect will benefit all regions. So let me spend a few moments updating you on our strategies to enhance the guest experience in store and online. We are seeing good results in our store, where we are implementing new ways to elevate the guest experience through updated fixture package, further reductions in SKU density and increased localization of assortment. We're also better organizing the guest journey by changing product adjacencies and merchandising by activity.

In digital, we have a sharp focus on storytelling and driving conversion when guests visit our e-commerce sites. We recently redesigned our homepage as well as category detail page. And in the next few weeks, we will be updating also our product detail page.

Shifting now to China Mainland. As Meghan mentioned, we have seen several issues impacting brand sentiment in product in China, which have hurt traffic and overall sales momentum. This began with spikes of negative commentary in the media and on social channels at the end of Q1 and early Q2 and was compounded by the additional commentary post our Q1 call related to an event we held on the Great Wall of China. These factors have contributed to softness in both our store and digital channels. Performance in e-commerce further impacted by a decision made by Tmall not to anniversary their 618 event in the same way as last year. In addition, we did not participate in promotions following this event.

In Q2, revenue increased by 4% on a reported basis and declined 2% on a constant currency basis, well below our expectation. As you know, we've experienced rapid growth in China Mainland over the last several years. But while we are disappointed with the current performance in the region, we are focused across both product and brand efforts to drive inflection. And we remain confident in our teams, our strategy, the underlying strength of our brand and the opportunity China Mainland continues to hold for Lululemon's future. End of Q2, we were pleased with the guest response to our Together Feels Better campaign. This featured both in-store and online moments with the highlight being a live stream event simultaneously broadcast across 5 platforms. We featured lululemon ambassador and world champion swimmer, Wang Shun, along with other athletes to bring to life our campaign message. And we are building further our credibility in tennis and we're excited to celebrate with lululemon ambassador, Guo Hanyu, the first Chinese athlete in our ambassador roster to win a Grand Slam Tennis title during Wimbledon.

Looking ahead, we will strengthen our brand narrative and messaging through a multilayered approach, including key new store openings with associated activations, partnering with Tmall for a Super Brand Day event and leverage our thought leadership in the well-being space with an event for World Mental Health Day. And this momentum and the guest engagement, we continue to see with these campaigns and activations show the underlying strength of lululemon in the market and the potential that exists for us in China Mainland.

Next, I will spend a few minutes on our Rest of the World segment, comprised of EMEA and APAC. In total, Q2 revenue in Rest of the World increased 5% on a reported basis and 6% in constant currency.

Let me share a few more details beginning with South Korea. This market continues to be one of our strongest across the globe, and we were excited to celebrate our tenth anniversary in August. We reopened our first-ever store in this market with our new design concept and hosted a special evening event and a series of movement classes attended by guests and ambassadors. In Australia, our top line performance has been impacted as we've seen the market grow increasingly promotional. As we are not joining in with promotional events, we have seen a slowing in guest purchase behavior, but we continue to see strong guest engagement with our events with a recent example being our Sydney Marathon activations. In Japan, while the market is still experiencing reduced traffic of tourism, our brand remains strong. We recently opened our largest store in APAC in Tokyo, Harajuku district, and it's seen a great response from guests.

And lastly, in EMEA, while our Middle East franchise business continues to be impacted by the conflict in the region as does tourism in Europe, we remain excited about our potential in the region. Beginning last week, we launched our first marketing collaboration with the online leader Zalando across 12 markets in Europe and will be showing up in unique ways at the Berlin Marathon later this month. And we continue to expand our presence through recent franchise store openings in Athens, Greece and in Bucharest, Romania. This market expansion speaks to the still untapped demand for our brand in new markets as we look at our longer-term plans.

I will now hand it back to Meghan to share more details about our financial performance.

Thanks, Andre. Let me now get into the Q2 financial review and our updated guidance outlook. For Q2, total net revenue decreased 4% or 5% in constant currency to $2.4 billion and comparable sales decreased 10%. Within our regions and channels, results were as follows: North America revenue decreased 8% with comparable sales down 12%. By country, revenue decreased 11% or 9% in constant currency in Canada and decreased 8% in the U.S. China Mainland revenue increased 4% or decreased 2% in constant currency, with comparable sales decreasing 8%. And in our Rest of World segment, revenue increased by 5% or 6% in constant currency with comparable sales decreasing 3%.

In our store channel, total sales decreased 6%, and we ended the quarter with 825 stores globally. Square footage increased 11% versus last year, driven by the addition of 41 net new lululemon stores since Q2 of 2025. During the quarter, we opened 9 net new stores and completed 12 optimizations. In our digital channel, revenues decreased 6% and contributed $0.9 billion of top line or 39% of total revenue. And by category, men's revenue decreased approximately 1% versus last year and women's decreased 4%, while accessories and other declined by 13%.

Gross profit for the second quarter was $1.46 billion, or 60.5% of net revenue compared to 58.5% in Q2 2025. Gross margin increased 200 basis points compared to last year and was driven primarily by the following: 560 basis points of benefit from IEEPA tariff refunds, a 150 basis point decline in overall product margin driven predominantly by tariff impact and markdowns. Tariffs exclusive of the refund had a gross negative impact of 160 basis points in the quarter, offset by 100 basis points related to our enterprise efficiency initiatives.

Markdowns increased 70 basis points. Deleverage on fixed costs was 230 basis points, driven by ongoing investments in our store, fleet and regional mix and additional fulfillment costs as we optimize our North America DC network. Foreign exchange had 20 basis points of favorable impact. Excluding the tariff refund, gross margin was 50 basis points better than our guidance for a 410 basis point decline driven by 40 basis points related to the reversal of an incentive compensation accrual and favorable channel and category mix, offset by slightly higher markdowns.

Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also strategically investing to strengthen our foundation and position lululemon for future growth. SG&A expenses were approximately $1.01 billion, or 41.7% of net revenue compared to 37.7% of net revenue for the same period last year. The increase of 400 basis points relates to fixed cost deleverage, continued investment in guest experience, including store labor hours, marketing spend and fees related to the proxy contest. These were partially offset by an incentive compensation accrual reversal and our ongoing initiatives to prudently manage costs across the enterprise.

Relative to our guidance for SG&A deleverage of 500 basis points, the improvement was driven by lower incentive compensation and additional actions to manage costs across the business. Operating income for the quarter was $454 million or 18.8% of net revenue compared to 20.7% of net revenue in Q2 2025. This result includes $134.5 million pretax benefit from IEEPA tariff refunds, which added 560 basis points to operating margin.

Tax expense for the quarter was $138.1 million, or 29.6% of pretax earnings compared to an effective tax rate of 30.5% a year ago. The decrease was primarily due to a decrease in nondeductible expenses in international jurisdictions partially offset by adjustments upon the filing of income tax returns. Net income for the quarter was $329 million or $2.92 per diluted share compared to $3.10 for the second quarter of 2025. Tariff refunds and associated interest net of tax, contributed $0.86 to EPS. Capital expenditures were approximately $150 million for the quarter compared to approximately $178 million in the second quarter last year. Q2 spend relates primarily to investments to support long-term business growth including our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments.

Turning to our balance sheet highlights. We ended the quarter with $1.4 billion in cash and cash equivalents and nearly $600 million of available capacity under our committed revolving credit facility. Inventory at the end of Q2 is $1.7 billion, a decrease of 1% on a dollar basis. On a unit basis, inventory decreased approximately 7%. The difference between dollar inventory growth and unit inventory growth relates predominantly to higher tariff costs and foreign exchange. We repurchased approximately 2.7 million shares at an average price of $120.

Let me shift now to our guidance for Q3, which has gotten off to a slow start. While we are working hard to change the trajectory of the business and adapting our action plan in light of current trends, we're taking a prudent approach to our outlook for the second half of the year. At the highest level, our revenue guidance for the second half assumes a slower trend relative to Q2 in our North America business and performance relatively consistent with Q2 trends in international. And while our teams remain hard at work executing our plans across product, brand and guest experience, and we strive to do better, we have not factored this potential into our financial outlook.

For Q3, we expect revenue in the range of $2.29 billion to $2.32 billion, representing a decline of 10% to 11%. We expect to open approximately 17 net new company-operated stores and complete 15 optimizations. By region, on a reported basis, we expect North America to decline in the mid-teens, the [ U.S. ] also in that range and Canada lower. We expect the China Mainland and the Rest of World to increase 3% to 5%. We expect gross margin in Q3 to decrease approximately 250 basis points compared to Q3 of 2025. While we expect an improvement in product margin, this will be offset by deleverage on fixed costs and ongoing investment in store openings, optimizations and our distribution network.

When looking specifically at markdowns, we expect an increase of approximately 60 basis points versus last year. While we continue to focus on improving full price selling, the slower-than-expected top line trends will necessitate additional seasonal clearance. In Q3, we expect our SG&A rate to deleverage by 800 basis points relative to Q3 2025. This increase will be driven primarily by deleverage associated with lower sales than initially expected, increased marketing and expense timing versus last year. And we will continue to invest strategically in our growth initiatives in IT infrastructure. When looking at operating margin for Q3, we expect it to be approximately 6.5% versus 17% in Q3 2025 for the reasons I just mentioned.

Turning to EPS. We expect earnings per share in the third quarter to be in the range of $0.93 to $0.98 versus EPS of $2.59 a year ago. We expect our effective tax rate in Q3 to be approximately 30%. When looking at inventory at the end of Q3, we expect dollar growth to be in the low single-digit range with units down slightly.

Turning to our full year 2026 guidance outlook. We now expect revenue to be in the range of $10.35 billion to $10.5 billion, down 5% to 7% relative to 2025. By region, we now expect revenue in North America to be down in the low double digits with the U.S. also in that range and Canada slightly lower. We now expect revenue in China Mainland to be up in the high single digits. And in Rest of World, we now expect revenue to increase in the mid-single digits. Globally, we now expect to open approximately 35 net new company-operated stores in 2026 and continue to expect to complete approximately 35 optimizations. This will contribute to overall square footage growth of approximately 10%. Our new store openings in 2026 will include approximately 10 stores in North America, including 7 in Mexico and approximately 25 in our international markets.

For the full year, we now expect gross margin to decrease approximately 80 basis points relative to last year. We expect an improvement in product margin, driven by a 130 basis point positive impact related to the Q2 tariff refund plus ongoing benefits from our mitigation strategies. These benefits are expected to be offset by deleverage on fixed costs and ongoing investment on our new store openings, optimizations and our distribution center network.

When looking at markdowns, we expect an increase for the full year of 40 basis points. When looking at tariffs more closely for the full year, our guidance now assumes a rate of 10% to 12.5% through September, and we continue to assume a rate of 20% for the remainder of the year. In addition, while we continue to participate in the refund process, our guidance assumes no additional recovery of tariffs paid under IEEPA.

Turning now to SG&A for the full year. While we intend to realize significant savings related to the enterprise enablement pillar of our action plan, we now expect an increase of approximately 450 basis points versus 2025. This will be driven by increased deleverage associated with our updated view on top line, increased marketing spend and continued strategic investments in our business to support future growth, including market expansion and improving the guest experience by enhancing our omni capabilities. When looking at operating margin for the full year 2026, we now expect it to decrease by approximately 530 basis points versus last year, which includes the 130 basis point benefit from tariff refunds recognized in the second quarter.

For the full year 2026, we expect our effective tax rate to be approximately 30% versus our 2025 effective tax rate of 29.5%. For the fiscal year 2026, we now expect diluted earnings per share in the range of $9.48 to $9.73 versus EPS of $13.26 in 2025. This updated range includes an $0.86 benefit from tariff refunds recognized in the second quarter, but does not include the impact of any potential additional refunds through the balance of the year.

Our EPS guidance also excludes the impact of any future share repurchases. When looking at inventory, we expect dollar growth to be up in the mid-single-digit range with units approximately flat. At the end of Q2, we had approximately $713 million remaining on our share repurchase program, which we will continue to utilize. Share repurchases remain our preferred method of returning cash to shareholders, and we continue to expect our repurchase levels in 2026 to be in line with 2025.

Finally, for the full year, we now expect capital expenditures to be approximately $680 million to $700 million. The spend reflects investments to support business growth, including capital for new locations, relocations and renovations, DC and technology investments.

Before we take your questions, I want to emphasize that we know there is significant work ahead for us. We're applying what we're learning this year to how we operate globally going forward. Our teams are executing against our action plan now chasing into what's working, investing into brand and community and running a tighter expense base. Andre and I are confident in our leadership teams across every market, and we believe that with the right adjustments to our product assortment, marketing and community activations improved revenue trends will follow. One thing is certain to me, our brand has real opportunity ahead of it. We've seen this with a response to SeaWheeze and engagement with our campaigns and in the strength of our teams around the world. We know our guests continue to love the brand, and we need to consistently give them the product and experience they can expect from lululemon. And as Heidi joins us next week, I'm confident that she'll help us realize this opportunity.

Finally, I want to thank the leaders and employees of our company for their determination to make progress every day and for operating in a way that's consistent with our values as we innovate for our guests.

Operator, we'll now take your questions.

[Operator Instructions] The first question comes from Alex Straton with Morgan Stanley.

Can you just talk about from a strategic perspective, like where you're at in your journey with stores and reducing SKUs and making it a better experience, and any fleet rationalization considerations going forward? I know you took the targets down. But as you think about it bigger picture and longer term?

Great. Thanks, Alex. I'll give some details on just stores overall, and then Andre is going to provide a little bit of color. So in terms of stores, we are scrutinizing every deal. We're opening 35 net new stores this year, about 10 of those net new stores in North America, 7 of those are in Mexico. Of the openings, we've got in North America, about half of them are pop-up conversions where we've got evidence of strong productivity and then the balance would be strategic presence and then key market saturation. So we'll continue to take that posture as we move throughout '27 as well, really scrutinizing every deal. And then I'll pass it to Andre to provide more color.

Yes, absolutely. And what -- to really enhance the guest experience in our stores, specifically in North America, we have made several enhancements to premiumize this experience. It includes a lesser dense presentation, so we decreased SKUs by 15% and now we are rolling it out in the rest of the fleet. We'll have a sharper focus on merchandising and VM. We've seen that organizing the store by activities on one side and lifestyle has improved the storytelling and the engagement of the guest to the range. And in addition, we have a smaller subset of doors where we are testing additional enhancements that include further SKU reductions, more curated assortment based on local taste and preferences, new fixtures packages and also using more imagery and activity mannequins. So once the formula is nailed, we will scale it to the rest of the fleet.

Maybe just one quick follow-up on your promotion comments and how you guys not being promotional is potentially impacting you. Is that a global phenomenon or in certain markets? And also is it in certain categories?

Yes. I think what Andre was referring to was in certain markets where we're seeing them be more promotional, for example, Australia, and we are not participating in those promotions. I would say, overall, our goal has been to return to a healthy full-price penetration of business. Clearly, with revenue, not where we expected this year, we have more seasonal product to clear through by year-end, and that's reflected in our guide. So it's not promotions driving that. It's seasonal clearance primarily at end of season.

The next question comes from Ike Boruchow with Wells Fargo.

I'm not sure if this is for you, Meghan, but I kind of wanted to ask a bigger picture question about the cost structure of the business. Given the underperformance on top line and the fact that it doesn't feel like that's been fully diagnosed yet, the deleverage you guys are seeing is kind of indicative of a model that is built to be comping fairly positive. How quickly can you adjust the cost structure? And I don't know if that's getting out of leases or looking at the store base. But just curious, the timing of that because if the top line trajectory doesn't turn in the next couple of quarters, it just feels like this could get a bit messier as you kind of get into next year. So just curious of your thoughts.

Thanks, Ike. Yes, as I mentioned, we are in action on the cost side. We have had an active work stream in cost management throughout this year, really focused on supply chain, procurement, technology. We have taken some near-term steps to manage discretionary expense. So across some of the buckets I mentioned, like travel, professional fees, store labor hours, moderating headcount growth. I would say, given current trends, we are taking a deeper look to right size the cost base to the current business with still protecting the long-term trajectory of the business and really primarily product and brand, where we feel like we really need to move on the sentiment side as well as support our product engine moving into '27. So I think too early to share beyond the guidance that we shared for '26, but we are taking a hard look across all aspects of our business model.

Next question comes from Matthew Boss for JPMorgan.

So Meghan, on the sequential softening in Mainland China and Rest of World, how much do you attribute to macro relative to product assortment. And can you elaborate on August trends? Or just what gives you confidence in the third quarter as the trough?

Yes. So in terms of China, I would say we're really looking at primarily brand noise impacting brand sentiment as well as a softer 618 Tmall event that Andre mentioned. And then we are seeing across the globe newness not perform at expectations. So I would say macro has been challenging in China for some time. We're not pointing to macro specifically as a key issue. As we look to the second half, I would say our quarter-to-date trend does support how we've looked at the international business towards the back half of the year as well as China. And maybe I'll ask Andre to add a few more details on how we're actioning China in the second half.

Yes. In China, we are really focusing on implementing continuous activations of the brand just in the upcoming weeks. We'll have new store openings with the associated activations in key locations of top Tier 1 cities. We also are conducting a Super Brand Day around our outerwear and Wunder Puff icon so a big activation there. And also early October, we are leveraging our leadership in World Mental Health Day activation to keep positioning our brand on wellness, that's the underlying trend there. So all that to counter this initial negative noise that Meghan referred in Q2.

And Meghan, just as a follow-up on the 12% comp decline in the Americas in the second quarter and the inconsistency that you cited, are there any green shoots that you've seen in August with product newness now restored to your targeted levels?

Yes. I would say August, as reflected in our guidance, has gotten off to a bit of a slow start. That said, we are seeing some green shoots in product, particularly in our away-from-body assortment, including our Groove Pants, Align Foldover Jogger, new Dance Studio. We're also reordering into some silhouettes to Define. We've got a new Scuba offering that's launched and Steady State that's doing well. So what we've reflected in our guidance is what we're currently seeing in the trend, but we are aggressively, as we've mentioned, reordering into what's working and any upside from that would not be reflected.

The next question comes from Lorraine Hutchinson with Bank of America.

Understanding that most of your leases are signed for this year, as you look out into next year, are you pausing any of your store opening plans for China or store expansions in the U.S. until you can stabilize those businesses?

Lorraine, I would say we're taking a very measured approach to store expansion. So China, I would say we still see tremendous opportunity from a market expansion standpoint there in terms of square footage and store footprint, and we are taking a hard look at that, obviously, given business trends, but taking a long-term view of the opportunity in that market.

In North America, as I mentioned, we just have a handful of new store openings this year, half of which are pop-up conversions where we've really tested that market and it has productivity that supports a full-time location. And then in addition to that, we just have a handful of strategic stores where we feel we need a presence in that market, whether that's a new location or saturation of an existing market that's performing well. I would say we're taking that approach into and we're just taking a hard look at everything given current performance of business, and we will share more about how we see square footage growth for '27 when we give guidance in March.

The next question comes from Michael Binetti with Evercore.

Meghan, I think just a quick one on the model. Your guidance, I think, if I got my math right, it implies a slight improvement in markdowns sequentially from 2Q in each quarter. Are you -- can you just talk us through how you think the seasonal clearance mix will go? Does that roll off by the end of 3Q? And then maybe in China, if we could get a sense of the monthly cadence given your comments around some of the Tmall event 16 -- 618, sorry. If the macro persists there or if the brand issues persist there, is the right thing to do for the brand? Or how are you thinking about whether you'd refrain from promoting again as we get into some of those next Tmall windows, like some of the bigger ones in November?

Yes, Michael. So in terms of markdowns by quarter, we were up 70 basis points year-over-year in Q2. We're expecting 60 basis point increase in Q3, so a slight moderation. And then we are against -- up against a high water line in Q4. So we're expecting markdowns to be approximately flat in the fourth quarter and then 40 basis points up for the year. So that's the shape of that, and it is based on seasonal clearance of goods that haven't moved during '26. In terms of China, we saw some pressure in May. It's subsided to some degree in June, and we also saw more pressure in July. And then I'll ask Andre to just comment on Tmall.

Yes. We're definitely with a hyperfocus on the regular price increase in China, and I think we had a healthy performance there. So we continue to use Tmall, it's shop-in-shop, and it's not promotion related. When I refer to the Super Brand Day, it's a full price event on our icons, which is the Wunder Puff to launch our outerwear season. And looking for the end of the quarter and beginning Q4 the 11/11 event, we will just participate as normal to anniversary our previous year's business that we've been doing last year.

The next question comes from Paul Lejuez from Citi.

Curious, at a high level, if you think you've got a traffic problem that can be solved by increased marketing? Or would you say that you have more of a product problem that requires a little bit more adjustment and time? And how does that answer differ if you think about it region by region?

Thanks, Paul. I would say, predominantly, we're seeing the pressure in traffic. We're also seeing negative year-over-year conversion, but we're not seeing that worsen. So we've really pointed to two opportunities. So one being we've seen some pressure on brand heat and sentiment, and we are investing into marketing and some of the activations that we've had throughout this summer. And then we've got some things in front of us including currently, we're right now at the U.S. Open with an activation. We've got fall marathon season coming up. New York, Chicago, Toronto, we'll have a presence with those and then we'll continue some of our social activations through new episodes on our content series there. From a conversion perspective, product, we continue to learn from what's working, not working, reordering aggressively into what is working. And so we're looking to move the needle, I would say, on both fronts with those actions.

Was that all comment about the Americas? Or is that -- you talking globally, Meghan?

Yes, I can take for China. The main issue was more the events that impacted the brand sentiment. So the focus there is to restore the consideration of the brand at levels that were prior to these events. And that's the main driver to restore traffic -- organic traffic and bring back the demand we've been experiencing. So we'll have the swing there and the additional work on newness in products will also benefit China. But the first reason is the main focus there definitely.

I'd say, Paul, the traffic being the biggest driver is across both regions.

Got it. And then just market growth by region? How do you view the market that you're playing in, in each region?

Yes. I would say the market continues to be competitive across all regions. And we really need to be differentiated, offering new innovation. So our actions are geared towards the market we're operating in, in both North America and China, and I would say both competitive markets.

The next question comes from Adrienne Yih with Barclays.

I guess my first question is, often times, when you get into sort of the trends, the first thing you go back to is sort of the customers, what do they want from you? How are they thinking about the brand. So as you do your kind of customer feedback, what are you finding out about the current customer today and what they need from the brand? My second question is, a lot of the fixes that we're talking about today, stores are sort of at the end of the process, like what do we do about inventory today? Can you talk to us about how you're thinking about the innovation process, the development process, lead times and kind of from the origin, right? What's different about that product development process.

Thanks, Adrienne. So I would say in terms of guest feedback, we certainly use that to inform our actions. So we have been doing some consumer research. And I would say what we're hearing is they're looking for new and differentiated product from us, innovation, and they are also looking for those community engagements that we offered. And some of the examples that I provided this summer really show some momentum in that engagement, including SeaWheeze at the level of 10,000 runners -- sorry, 85,000 Strava participants, really some positive momentum in terms of engagement with the brand as well as our summer series. So I would say we are really embedding what we're hearing from our guests into that action plan.

And then in terms of our pipeline, we have made some improvements, as we mentioned, to our go-to-market process to reduce lead times. So that is underway. I think that will continue to improve over time as well as we've really leaned into our chase capabilities. We are reordering into about 20% more than last year. So we've really augmented our capabilities there. And then also from a fast track design perspective, looking to get back into product with a faster lead time from a design to market perspective as well. So certainly looking at improving that over time.

Okay. And then my follow-up is on the marketing. You talked about increasing some marketing investments in the back half of the year. Just wondering if you don't know that the product is kind of really kind of resonating, are those marketing kind of higher level? Are they more social? Can you talk about like how that return on that advertising spend, how you're considering that going into that period?

Yes. I would say given the challenges we've seen with -- from both the brand heat and product perspective, we do feel strongly that we need to continue to keep our investment level in marketing. I would say we're looking at more mid-funnel, top-of-funnel activations, community engagement, things such as what I've mentioned in terms of SeaWheeze, summer series, going after fall marathon season, our U.S. open activation the content series as well as social. So it's definitely brand-building marketing efforts.

Next question comes from Dana Telsey with Telsey Group.

As you talk about the product and the response to some of the new products that are out there, Meghan, you had mentioned in the prepared remarks a little about adjustments are being made. What are you seeing in response to the new product for men's, women's, tops and bottoms? I know you talked about leggings for women's down 20%. What adjustments do you see need to be made? What's the time line of them being made and did pricing factor into any of it? And then I have a follow-up.

Thanks, Dana. So in terms of what's working today, away from body I mentioned is working, Define, Scuba are working. We did see some positive reception to our golf assortment and some attachment to our ABC Pants. We are experiencing some other new products that are not resonating as well. So we're adjusting to that and reordering what is working. And then we've also seen some decline greater than we expected in some of our core categories, including leggings that we mentioned. And there, it's also relevant that we're shifting into away-from-body. We've really seen some positive response to that, and the shift has been happening over time, but it was a little more than we expected in Q2. So we're chasing into that and overall bottoms trends are down in the mid-single digits. So we're offsetting to a degree, but not entirely. So we're looking to improve our position in away-from-body over time.

Got it. And then when you think about channel stores and online. Is there at all a difference in the performance of stores and online and traffic patterns to each for the brand?

I'd say we've overall seen traffic pressure in both channels as well as some conversion pressure in both channels as well. So it's been relatively consistent, I would say, in terms of where we've seen the impact and really connects back to our priorities of getting after brand sentiment with some of the activations we have planned as well as some conversion actions we have both in product and the improvements we're making there. And then some of the experience pieces that Andre spoke to in terms of store shopability and as well as the e-commerce enhancements we've made toward the look and feel of our website.

Operator, we'll take one more question.

The last question comes from Mark Altschwager with Baird.

Maybe just one more on the shape of the year for the guide, backing into Q4. I think the revenue trends imply pretty similar, but you are baking in less margin pressure. Could you just help bridge that for us? I know you said you expect the promotion piece to get a little bit better, but what are the other factors we should be considering there like with the cost actions that you outlined and other factors? And then I have a follow-up.

Yes. Thanks, Mark. Yes. So for Q4, we're expecting around 250 basis points in operating margin pressure. So it is moderated from Q3. We are expecting to see gross margin slightly ahead of last year, and that's really driven by, first of all, we have a higher water line from a revenue perspective in Q4, so less fixed cost deleverage. We also have a tariff benefit, so more of our mitigation actions come into play as we move throughout this year. So we're seeing an accelerating benefit there and essentially flat markdowns and where we've got some pressure in Q2 and Q3. And then from an expense perspective, we will still have deleverage, but it will be much less, I would say, than the Q3.

Okay. And then on tariffs, the Q says you paid about $230 million in IEEPA tariffs. You've received $135 million back. I guess, what's the process and the realistic timing on the remainder? And is there a reason you wouldn't ultimately receive the rest of back?

Yes. So we did receive $134 million back in Q2. We have not reflected the remaining $105 million in our forward guidance. There remains some uncertainty in the process that we are actively participating.

That's all the time we have for questions today. Thank you for joining today's call, and have a nice day.

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] The conference is being recorded.

I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's First Quarter Earnings Conference Call. Joining me today are Meghan Frank, Interim Co-CEO and CFO; and Andre Maestrini, Interim Co-CEO, President and Chief Commercial Officer.

Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of lululemon's future. These statements are based on current information, which we have assessed, but by which its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com.

On today's call, Meghan will begin with some remarks addressing current business trends and our updated guidance. Then she and Andre will speak to the plans and strategies we are implementing to drive improved performance and also share some Q1 highlights. Meghan will then discuss our detailed financials and guidance outlook, and then the team will be happy to take your questions. Before I turn the call over to Meghan, I'd like to remind investors to visit our investor site where you'll find a summary of our key financial and operating statistics for the first quarter as well as our quarterly infographic.

Meghan, over to you.

Thanks, Howard, and welcome, everyone, to our Q1 call. Before we dive into our results and current business trends, I want to say how excited we are to welcome incoming CEO, Heidi O'Neill, to the company in September. Andre and I both spent time with Heidi. It's clear to me, she has a true passion for the lululemon brand, a deep understanding of product excellence, extensive experience driving growth and transformation at scale and will be a strong leader for our organization. I'm looking forward to working with her to help lululemon achieve the opportunities in front of us.

I also want to give a warm welcome on behalf of the leadership team to our newest Director, Esi Eggleston Bracey, who joined the Board in April as well as to Laura Gentile and Marc Maurer, who will join the Board following our annual meeting later this month. We appreciate the support of the full Board, including these new directors as we continue to advance our plans and strategies.

Turning to the business. Andre and I remain deeply engaged with our teams with a clear focus on disciplined execution and brand vision. Our priorities are straightforward: strengthen performance in North America while continuing to expand our global growth engine. We saw encouraging signs in Q1 that reinforce we're moving in the right direction. But as we closed Q1 and entered Q2, we faced a few headwinds and a moderating sales trend. Based on our early analysis, there are 2 key factors impacting our trend. First, we experienced spikes of negative commentary in the media and on social channels with regard to our brand, which had an impact on traffic and overall top line performance. And second, not all of our product launches have met our expectations.

While we've had several successful launches so far this year, we've seen others as we start Q2 not generate the anticipated guest response. Taken together, these factors impacted performance and are reflected in our updated guidance. I want to emphasize that we are not sitting still, and we are moving with urgency to make the necessary adjustments to reaccelerate momentum, particularly in North America. With that, let's turn to the work already in motion to strengthen our top line trajectory and position ourselves for long-term sustainable growth.

Let's begin with our product creation pillar. As a reminder, our intent with this work stream is to raise the bar on product design, including bringing a new creative energy into our key franchises, deliver a consistent flow of innovation, increase our speed to market and ensure a relentless focus on product quality. Across the assortment in Q1, we saw good guest response to the updates we brought into some of our key run franchises, including Fast & Free, Swiftly and Metal Vent. Other standouts I'd mention include Daydrift and Define, where we offered expanded silhouettes and new and elevated colors. However, more recently, our new look of yoga campaign didn't drive top line results in line with our expectations.

As part of the campaign, we featured away-from-body styles across our align and group franchises. These styles were met with good guest response, but so far, the campaign hasn't had the expected halo effect on other areas of our assortment. We're pleased with our overall product pipeline. And in Q2, you will see more warm weather styles across some of our key activities, including run, tennis, golf and our lifestyle offerings. Over the course of the year, we'll continue to bring newness, excitement and new fabrics into the assortment with focus areas, including outerwear and lounge.

To help improve the sales trend, we are leaning into our chase capabilities now and over the balance of the year. As we discussed on prior calls, our faster chase times improve our ability to read and react to guest demand trends and get back into certain strong performing styles more quickly. We are chasing 20% more volume this year relative to last year, and we see this as an important capability going forward. And with inventory units down approximately 4%, when we see strong guest reaction to new styles, we can get back into them more quickly, which we expect can help accelerate our momentum.

We have also reduced our mainline product development process from 18 to 24 months to 15 to 16 months, and we are working to further reduce it down to 12 to 14 months. Our product teams are focused on bringing new innovations to our guests, updating our iconic franchises and leveraging our increased speed-to-market capabilities to better anticipate, meet and fuel demand. I also want to reiterate that product quality is foundational to our brand, and we will continue to lean into this principle and enduring strength of lululemon.

Turning now to our product activation pillar. Andre will share the details of our regional activations in a moment, but I want to speak at a high level to some of our brand and marketing initiatives. To shift the narrative in this competitive market, we are moving with speed to invest more in marketing, community experiences and product stories to connect with and deepen engagement with our guests. You will see us be bolder in the second half of the year with more brand activations, similar to last week's yoga experience on the Great Wall of China. And in August, we are excited to see the return of SeaWheeze, our iconic half marathon event in Vancouver, which was a near-instant sellout.

You will see additional product expressions like new collaborations to drive energy and excitement for guests in key cities around the world. You will also see grassroot community activations, a particular strength of our brand as well as new and exclusive experiences for press and partners. All of this will be underpinned by an innovative media and advertising strategy, store and brand experience elevation, additional partnerships and a creative direction for lululemon that will inspire our guests around the world to sweat, grow and connect.

Next, I wanted to share an update on our enterprise enablement pillar. This is a broad initiative across the enterprise to ensure we are operating as efficiently and effectively as possible as we look at process, technology and our operating model. To drill down a bit, projects we are continuing to advance include analyzing our current global supply chain network to ensure the structure is fully optimized, reducing indirect spend through our procurement process, including price and terms optimization, volume consolidation and rationalization and implementing new technology, including AI-powered systems and automation to drive efficiencies across the enterprise. We're pleased with how our teams are implementing the initiatives in these areas, and we expect to see benefits over time. In summary, we expect our actions to help rebuild momentum, expand share and reassert our leadership position.

I'll now hand it over to Andre, who will share some more details with you regarding our guest engagement strategies and our regional highlights. Andre?

Thank you, Meghan, and good afternoon, everyone. It's good to be here with you again. I'll start by noting that I'm also excited to welcome Heidi as our new CEO, and I'm looking forward to working with her as our entire team continues our efforts to realize lululemon's full potential. Let's get to a regional review of Q1 performance and start with North America. In Q1, I'm encouraged that we have experienced a sequential improvement in our full price sales relative to Q4. In Q2, based on recent sales trend, our guidance assumes higher levels of seasonal clearance, but looking forward, driving full price sales remain a primary focus.

Let me now share some of the highlights and progress we are making across our product activation pillar in North America and speak to some of the unique experiences we have lined up to engage our guests and help drive improved brand momentum. In addition to the successful Studio Yet and our Indian Wells Tennis activations, we further engaged with guests during the quarter through our run activations during the Los Angeles and Boston marathons. We designed and launched limited edition race kits for several of these events and featured additional innovation across our Swiftly, Milemaker and Go Further product collections. We are pleased with the high level of guest engagement and demand for these events and special products, reinforcing the power of our community efforts.

Looking ahead, we have several exciting events planned across North America, including our yoga summer series will kick it off with an exclusive New York City event and follow up with free yoga classes throughout the summer, which will serve tens of thousands of guests around the region. And in August, I'm excited that we are bringing back our popular SeaWheeze Half Marathon and Festival. We saw unprecedented demand to participate as we gathered in our hometown for a weekend of sweat and connection. These events are a few examples of the powerful yet unique way we inspire and engage with new and existing guests.

Let me also update you on the progress we've made to enhance the guest experience across our selling channels, starting with the in-store strategies aimed at elevating the shopping experience for our guests. When looking at our store fleet in North America, you can already see several enhancements. These include: first, a less dense presentation of products featuring 15% fewer SKU, which allows us to better highlight new styles and innovation. Second, a sharper focus on merchandising by performance and lifestyle products, which allow for improved storytelling, better visual merchandising and makes the store easier to navigate and shop. And third, a significant reduction in markdowns, which allows the guests to focus more on our new and full price offerings and contribute to our premium shopping experience.

In addition to these strategic shifts across all stores in the market, we have a smaller subset of doors where we are testing additional enhancements. These include further SKU reductions, more curated assortment based on local taste and preferences, new fixture packages and updated imagery and mannequin. With regard to e-commerce, we are continuing our work to elevate the guest experience on our digital channels. The teams are working to increase conversion with sharper visual merchandising, better storytelling and by offering a more premium shopping experience. This shows how our North America teams have been working to ensure our guests have the shopping experience they expect from lululemon. While we are pleased with the initial response, we expect that these initiatives to gain more traction over time.

Let me now shift to our international business, beginning with China Mainland. In China, we had a strong start of the year, supported by successful product and brand activations during Chinese New Year, run and tennis campaigns, but experienced a slowing of momentum towards the end of Q1 as we saw spikes of negative commentary, which has now subsided. The team is focused on building brand awareness and distinction through our mindful performance position and community activations. In yoga, one of the most powerful examples of this took place just a few days ago in Beijing on the Great Wall of China, where more than 2,000 guests and 70 ambassadors practiced yoga at a flagship event that launched a series of global activations.

And beginning in late June through August, we will host our sixth annual Summer Sweat Games. This is another pinnacle run and train activation our China team has designed to engage our community across the country, culminating in a national championship in Hangzhou. Clearly, there continues to be a lot of energy in this market, and the teams are bringing unique experiences to our guests that only lululemon can offer. For Q2, we expect sales to increase in the mid- to high teens, and we continue to expect approximately 20% growth for the year, demonstrating the ongoing momentum in the business in China and Mainland (sic) [ China Mainland ].

Let me finish my recap with our Rest of the World segment. We remain pleased with our business in APAC and EMEA. In Q1, revenue increased 13% or 9% in constant currency. We have seen some disruption in our Middle East franchise business due to the conflict in Iran, and we've also seen some softer tourism in Europe and Japan. We view these as temporary, and we remain excited for our brand's potential in both APAC and EMEA. With the help of our franchise partner, we recently opened the first location in Greece and plans are well underway to open in India later this year.

Before I hand it back to Meghan, I'd like to reiterate that we are focused across the regions on building brand relevance and momentum, delivering product excellence and actively engaging with our community. And we are grateful to our employees who stayed focused on these top priorities and on delivering for our guests. Recently, we gather our leaders from around the world in Vancouver and the passion, clarity and determination from this group of people is what gives us confidence in the near, mid and long term for lululemon.

Meghan, now back to you.

Thanks, Andre. Let me now get into the Q1 financial review and our updated guidance outlook. For Q1, total net revenue rose 4% or 2% in constant currency to $2.5 billion and comparable sales decreased 2%. Within our regions and channels, results were as follows: North America revenue decreased 3% or 4% in constant currency. Comparable sales were down 6%. By country, revenue decreased 3% or 6% in constant currency in Canada and decreased 4% in the U.S. China Mainland revenue increased 30% or 23% in constant currency with comparable sales increasing 13%. The shift of Chinese New Year into Q1 added 8 percentage points to the growth rate in the quarter. And in our Rest of World segment, revenue increased by 13% or 9% in constant currency, with comparable sales increasing 1%.

In our store channel, total sales increased 3%, and we ended the quarter with 816 stores globally. Square footage increased 11% versus last year, driven by the addition of 46 net new lululemon stores since Q1 of 2025. During the quarter, we opened 5 net new stores and completed 6 optimizations. In our digital channel, revenues increased 4% and contributed $1 billion of top line or 40% of total revenue. And by category, men's revenue increased 7% versus last year and women's increased 4%, while accessories and other declined by 1%. Gross profit for the first quarter was $1.34 billion or 54.2% of net revenue compared to 58.3% in Q1 2025.

Our gross margin decreased 410 basis points compared to last year and was driven primarily by the following: a 330 basis point decline in overall product margin driven predominantly by tariff impact and markdowns. Tariffs had a gross negative impact of 280 basis points in the quarter, offset by 100 basis points related to our enterprise efficiency initiatives. Markdowns increased 40 basis points. Deleverage on fixed cost was 140 basis points, driven by ongoing investments in our store fleet and regional mix and foreign exchange had 60 basis points of favorable impact.

Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also strategically investing in our plans and strategies to improve sales trend in North America, while also strengthening our foundation and positioning lululemon for long-term growth. SG&A expenses were approximately $1.06 billion or 42.9% of net revenue compared to 39.8% of net revenue for the same period last year. The increase of 310 basis points relates to expenses that we reduced last year, but layered back this year, including store labor hours and incentive comp, timing of certain brand activations and costs related to the proxy contest. These were partially offset by our ongoing initiatives to prudently manage costs across the enterprise.

Operating income for the quarter was $277 million or 11.2% of net revenue compared to 18.5% of net revenue in Q1 2025. Tax expense for the quarter was $91 million or 31.8% of pretax earnings compared to an effective tax rate of 30.2% a year ago. The increase relates to lower stock-based compensation deductions compared to last year. Net income for the quarter was $195 million or $1.69 per diluted share compared to $2.60 for the first quarter of 2025. Capital expenditures were approximately $127 million for the quarter compared to approximately $152 million in the first quarter last year. Q1 spend relates primarily to investments to support business growth, including our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments.

Turning to our balance sheet highlights. We ended the quarter with $1.5 billion in cash and cash equivalents and nearly $600 million of available capacity under our revolving credit facility. Inventory at the end of Q1 is $1.7 billion, an increase of 2% on a dollar basis. On a unit basis, inventory decreased approximately 4%. The difference between dollar inventory growth and unit inventory growth relates predominantly to higher tariff rates relative to last year and foreign exchange. We repurchased approximately 2.2 million shares at an average price of $165.

Let me shift now to our guidance for Q2, which takes into account the business trends I spoke to earlier. We expect revenue in the range of $2.45 billion to $2.475 billion, representing a decline of 2% to 3%. We expect to open approximately 13 net new company-operated stores and complete 13 optimizations. By region, we expect North America to decline in the low double digits with the U.S. also in that range. We expect China Mainland to increase in the mid- to high teens and Rest of World to increase in the high single to low double digits.

We expect gross margin in Q2 to decrease approximately 410 basis points compared to Q2 of 2025. This decrease will be driven predominantly by higher tariff costs, ongoing investments in store openings and optimizations and our distribution network. We expect increased tariffs to have a gross negative impact of approximately 150 basis points with offsets of approximately 100 basis points. We expect markdowns to be up approximately 50 basis points versus last year. While we continue to expect markdowns to improve modestly year-over-year in the second half, the slower-than-expected top line trends in Q2 will necessitate additional seasonal clearance.

In Q2, we expect our SG&A rate to deleverage by 500 basis points relative to Q2 2025. This increase will be driven in part by deleverage associated with lower sales than initially expected, discrete costs related to our proxy contest, increased marketing and expenses that we reduced last year but are layering back this year, including store labor hours. And we will continue to invest strategically in our growth initiatives in IT infrastructure. When looking at operating margin for Q2, we expect it to be approximately 11.6% versus 20.7% in Q2 2025 for the reasons I just mentioned. Turning to EPS. We expect earnings per share in the second quarter to be in the range of $1.76 to $1.81 versus EPS of $3.10 a year ago. We expect our effective tax rate in Q2 to be approximately 30%.

Turning to our full year 2026 guidance outlook. We now expect revenue to be in the range of $11 billion to $11.15 billion, flat to down 1% relative to 2025. By region, we now expect revenue in North America to be down in the high single digits with the U.S. slightly lower and Canada better. We continue to expect revenue in China Mainland to be up approximately 20%. And in Rest of World, we continue to expect revenue to increase in the mid-teens. Globally, we now expect to be closer to the low end of the 40 to 45 range for net new company-operated stores in 2026 and continue to expect to complete approximately 35 optimizations. This will contribute to overall square footage growth in the low double digits.

Our new store openings in 2026 will include approximately 10 to 15 stores in North America, including 8 in Mexico and 25 to 30 in our international markets, with the majority of these planned for China. While we are taking a disciplined approach to capital spending and looking at all real estate deals on a case-by-case basis, we continue to see good returns from new store openings and store expansions as these strategies contribute to an improved shopping experience for existing guests, new guest acquisition, building brand awareness and community engagement.

For the full year, we now expect gross margin to decrease approximately 90 basis points relative to last year, driven predominantly by deleverage on fixed costs and ongoing investment in new store openings, optimizations and our distribution center network. We expect markdowns for the full year to be flat to slightly improved and tariffs to have a gross impact of 30 basis points, of which we expect to be able to offset almost all of it. When looking at tariffs for the full year, our guidance now assumes an incremental rate of 10% for Q2. This is down from our prior assumption of approximately 20%. For the back half of 2026, we continue to assume a 20% incremental rate. In addition, while we are participating in the refund process, our guidance assumes no recovery of tariffs paid under IEEPA.

Turning now to SG&A for the full year. While we intend to realize significant savings related to the enterprise enablement pillar of our action plan, we now expect deleverage of approximately 290 basis points versus 2025, including incentive comp, store labor hours and continued strategic investments in our business to support future growth. These investments include market expansion, improving the guest experience by enhancing our omni capabilities and growing brand awareness. As mentioned, we are absorbing additional costs relative to last year as we layered back in certain expenses and have onetime costs associated with the proxy contest. In addition, based on recent trends, we are increasing our marketing spend to drive brand heat.

When looking at operating margin for the full year 2026, we now expect it to decrease by approximately 380 basis points versus last year. For the full year 2026, we expect our effective tax rate to be approximately 30% versus our 2025 effective tax rate of 29.5%. For the fiscal year 2026, we now expect diluted earnings per share in the range of $10.95 to $11.15 versus EPS of $13.26 in 2025. Our EPS guidance excludes the impact of any future share repurchases. When looking at inventory, we now expect dollar growth to be in the low to mid-single-digit range through 2026 with units slightly down. We have approximately $1 billion remaining on our share repurchase program, which we will continue to utilize.

Share repurchases remain our preferred method of returning cash to shareholders, and we continue to expect our repurchase levels in 2026 to be in line with 2025. Finally, for the full year, we now expect capital expenditures to be approximately $700 million to $720 million. The spend reflects investments to support business growth, including capital for new locations, relocations and renovations, DC and technology investments.

Before we open it up for Q&A, as we look at the second quarter and the back half, we will continue to be agile as we take actions that will drive our performance and engage with our guests. We are pleased that some of the recent distractions have been removed, and we remain sharply focused on returning the business to a position of strength in North America by chasing into strong performing styles, investing more in brand moments to engage with and excite our guests and continuing to execute on our action plan. There is significant potential ahead for lululemon, and we are taking the steps necessary to realize it.

Operator?

[Operator Instructions] The first question comes from Dana Telsey with Telsey Group.

As you think about the product assortment, the brand, how much of the weakness in the top line is coming from maybe the shift to more fashion versus what lulu is doing? And how do you think of the new items that you've introduced? What percentage of the assortment of there is it? And how do you see adjustments given the learnings you have from the initial entries that you've had? And just lastly, on the margins, the go-forward look of what margins should stabilize at, is clearance accelerating in the back half? Or are you looking for it to decelerate?

Dana, thank you. I would say, overall, in terms of our performance relative to the market, which I think was your first question, we're seeing relative stability in the trend of the athletic space. And what we really experienced was a dropoff in -- primarily in traffic and to a lesser degree, conversion over the last 6 to 7 weeks. And as I mentioned, our analysis indicated it came from 2 key areas.

So the first being spikes and negative commentary around the brand from a number of factors really at the end of Q1 and entering Q2. I mentioned that's now subsided, but we do believe it impacted our traffic and top line to a degree. And then in addition, while we've seen some of our product launches perform to expectations, we did see some recent product launches, which performed under expectations. So we're really focused on what we can do to action that.

In terms of go-forward margins and how much is driven by clearance, we are expecting gross margin 90 basis points under last year. Our prior expectation was 130. Within that, we're expecting a modest -- flat to modest improvement in markdowns for the full year. So we're having a bigger impact in spring/summer clearance in Q2 with an expectation of markdowns up 50 basis points and then some recovery as we move into the second half. Can you remind me, you had a question on percent of assortment?

How much of the percent of assortment is new versus how much is just core styles? And is the weakness in performance more related to core or the new? Is there a way to assess it?

Yes. Yes. So as we set out this year, our aim was to increase our penetration of newness to -- from 23% last year to 35% over the course of this year. Right now, we sit at about 30%. It will fluctuate as we move throughout '26. I would say, I mentioned we've seen some of that newness perform to expectation and some be a little short. And I would say our recent performance is impacting all areas of our business from a product perspective.

The next question comes from Rick Patel with Raymond James.

A question on new products not meeting expectations. Can you share if you see this as a risk for international markets? Curious if overseas customers are more drawn to core franchises and they are less sensitive to newness or if this is something that you would expect headwinds from a little further down the road. So just some color on how new products are resonating with international consumers would be great.

Yes. Thank you, Rick, for the question. Andre here. We see that the portfolio that we have in international markets with more recent is more diversified in the composition of the sales. And yes, you're right, by bringing the core franchise to life with different colors, different iterations is still a growth driver in international that plays stronger in those markets than our original North American market. So both, we play on the strength of our well-known global franchises, and we have this diversified newness portfolio in those markets operating to a bigger extent.

Great. And then just a follow-up on the question on markdowns. Can you help us understand the assumptions for the back half, which imply an improvement in markdowns? Is that just a function of easier comparisons? Or are you assuming demand improves in the back half?

Yes. In terms of the second half, I would say Q3 will be a sequential improvement to Q2. And then we expect markdowns in Q4 to be under last year, given that was our high water level from a markdown perspective. So I'd say sequentially better as we improve throughout the year. And again, for the full year, flat to modest improvement. So Q2 would be our high watermark this year.

The next question comes from Lorraine Hutchinson with Bank of America.

I was hoping to dig into the China business a little bit more. Can you talk about what happened there, if it was different than the experience in the U.S. and also the factors that give you confidence that it will improve as the year goes on?

Lorraine, thanks. I would say when we look back at the last 6- to 7-week period, which is really where we've seen the shift in the trend, we did experience an impact in China from some of the negative commentary that was out in the market, most pronounced at the end of April and early May. We have seen that business improve to a degree. We are still holding our guide for the year at 20%. And I would say that's fairly reflective of what we see as the underlying trend of the business and in line with the expectation we have for the second half. And then I'll have Andre add some color on what we're experiencing in terms of performance.

Yes. As you were saying, Meghan, as the brand noise has begun to dissipate, we continue to engage with guests in new and unique ways, including our Yoga Festival on the Great Wall just last week. And looking forward, we'll be hosting our sixth annual summer sweat games this summer, highlighting our latest run and train products. So we are confident that with our strong premium positioning in the market, the guests are going to really engage with the brand, and we'll be back to our underlying trend of business in line with this annual guidance that remains a growth of approximately the 20%.

The next question comes from Matthew Boss with JPMorgan.

So Meghan, could you speak to the progression of revenues in the Americas through the first quarter and elaborate on demand trends that you've seen in May, maybe relative to the outlook for low double-digit decline in the second quarter and just opportunities you see for sequential improvement in the back half?

Yes. Thanks, Matt. So in the Americas, we did see a negative 4% trend in Q1 overall, which was ahead of our expectations for low mid-single digit. I would say February and March were our strongest months. And as I mentioned, the shift we've seen in trend has really been over the last 6- to 7-week period. So we saw trends softened at the end of April and then into May. I would say our expectation for North America in Q2, a decline of low double digits and then generally in line in the second half of the year at this point.

We obviously described a number of actions we're taking in the business in terms of investment into brand to shift the narrative there and drive brand heat as well as some of the product activations we're pursuing, including chasing an incremental 20% relative to last year, still managing inventory well in line with our trend. So I would say we're not assuming any meaningful impact from those initiatives at this point. So to the extent that they perform the way we would expect them to, we could potentially see upside to our range.

Great. And then maybe just a follow-up, Meghan. So with newness, I think you said restored to 30%. And obviously, relative to your comments on some of the below-plan reception to recent product launches. Maybe just to circle back on the magnitude of decline that you're seeing in the Americas. Is it product design, category demand, macro, a little bit of all? What -- maybe if there was a way to bridge or try to bifurcate the buckets as to the magnitude of the decline that you're seeing in the Americas, that would be helpful.

Yes. I would say -- and this is based on our early analysis of this trend that's been about 6 to 7 weeks. But we have been evaluating and looking at the macro. Obviously, there's some macro noise. But we are, as I mentioned earlier, seeing some stability in our category right now, and we're seeing ourselves drop below where we were performing in early Q1, really seeing that predominantly through traffic and then to a lesser degree, conversion and really pointing to those 2 aspects that I noted in terms of negative commentary around the brand and really a spike there towards the end of April.

And then also from a product perspective, saw really favorable, I would say, results and tracking well relative to our expectations in February and March. And then saw that spike in, I would say, late April and then weren't as thrilled with our product performance with our recent launch. Good response, I would say, to the away-from-body yoga styles, but didn't have the halo to the balance of the assortment that we expected.

The next question comes from Michael Binetti with Evercore.

Can I just ask a little bit different way on the second half? Could you maybe just help us understand what's contemplated in there relative to 90 days ago, so we understand -- I know you're really clear on how you're adjusting 2Q. I'm just curious the update a little bit in that second half. And then maybe just on the SKU reductions, the SKU reductions in North America that you're talking about doing some testing, if you're seeing anything in terms of better conversion or sales productivity in the areas where you have started to look at that work? And where do you feel like you're most overskewed?

Thanks, Michael. I would say in terms of second half trends, so they're fairly consistent, I would say, with the underlying trend of our business right now. So it's a slight improvement relative to Q2 guide, but that's really reflective in some aspects of the impacts we saw in late Q1, early Q2 subsiding to a small degree and that trend carrying forward. We have not included, as I mentioned, any meaningful impact from any of the initiatives that we have underway. So again, just to the extent that they perform to what we would expect, we could see some upside to the range. Is that helpful?

Yes, that's helpful.

Great. And then Andre was going to comment on the SKU reduction.

Yes. On the stores, you're pointing it right. We decided to have a less dense presentation of our products featuring this 15% fewer SKUs. And that, as a matter of fact, allows us to better highlight the new styles and innovation. Also, it brings a sharper focus on merchandising by performance on one side and style -- lifestyle on the other for, again, a better, easier to navigate store layout. And we drastically reduce any markdown activity in the stores to contribute to a more and definitely premium shopping experience for the guests. So we are really encouraged, and we think that over time, it's going to build up and gain more traction.

I would just add to that -- sorry, in the first quarter, we saw a high single-digit increase in reg price globally. And we did see a meaningful sequential improvement in the U.S., I think, which points to some of the success of our strategy, particularly from SKU reduction also and removing some of the markdowns from store. And sorry, Michael, did you have something else?

No, you got it.

The next question comes from Brooke Roach with Goldman Sachs.

Meghan, Andre, I'd love your thoughts on the product design language and the learnings that you've realized from some of the new style launches that haven't resonated to your expectations. What changes should we be expecting in the way that you inform the way that you design and the new products that are coming to market on a go-forward basis? And then just an additional question on traffic. Does the shift in traffic that you've seen in recent weeks over-index to any specific consumer demographic cohort or guest type?

Thanks, Brooke. I would say certainly some learnings in terms of both design and then also importantly, how we activate product and what resonates in terms of guest messaging. I would say, as I mentioned, we saw good guest response from some of the products that we launched around the new look of yoga away-from-body, but didn't see the halo that we had hoped for and had in our plans. I do think color is an aspect of that. I do think some of these things also will take a little bit more time in terms of continuing to get them in front of guests, making sure they're seeing the newness and building into them over time. And then I'd say in terms of how we activate just front and center in stores and online, that continues to be a focus for us as well. And then can you remind me the second part of your question?

Is the change in traffic over-indexed to any specific consumer demographic cohort or guest type?

No. We really did see a broad-based traffic reduction, which was really all demographics.

Our next question comes from Jay Sole with UBS.

I was just wondering if you can elaborate on the social media issues that you talked about. What did they stem from? How long do they last? Why do they end? Is there any lingering impact? If you could help us with that, that would be great.

Yes. Thanks, Jay. So I would say there were a number of factors impacting the negative commentary around the brand, both, I would say, media and social. A couple to mention would be, obviously, we had the proxy contest during that period as well as we had some questions around the composition of some of our products in mid-April. As I mentioned, these stories have died down and subsided, but we have not yet seen a return to our pre-disruption, I'd say, trend. So we're closely monitoring and feel it's prudent, I think, to update our range in terms of what we're seeing today and the trend of the business.

Was it mostly in the U.S. and China, both or other regions?

I would say it was across regions. And predominantly, I would say China was impacted as well as the U.S.

The next question comes from Brian Nagel with Oppenheimer.

So my first question, you talked a lot about the recent products that may have not performed as well as you expected them to. So as you look at these products, do you have abilities -- are there levers to pull to maybe course correct on these products? And then given the performance of some of these products lately, has that encouraged you or cause you to change any type of launches you expected for the balance of the year?

Thanks, Brian. Yes, I mean, certainly taking our learnings forward. I would say in terms of what worked and mentioned a few of these, but our run assortment was strong in Q1. Daydrift has been a great style for us to find, including new silhouettes. And then I mentioned in terms of new look of yoga didn't respond in halo as we had expected. In terms of what's coming, we're still really excited about our product pipeline. We do have new lounge fabrics in the second half of the year. We'll have a hot weather assortment launching across run, tennis and golf.

And then we are reordering, as I mentioned, 20% more on an annual basis relative to last year. So that's pretty significant, I would say, in terms of the penetration of our business that we're chasing into and certainly prioritizing the styles that are working well. So a couple of examples there. The Groove pant has been a style that's been a great seller and we're reordering there and then Define continues to have a lot of energy around it, including the new silhouettes. So I would say, again, as I mentioned, we aren't embedding anything meaningful from these strategies into our guide for the second half. So to the extent that they perform how we would typically expect them to, we could see some upside.

That's helpful. And then my second question, so Meghan, you mentioned, I think, in your prepared comments that you've met with Heidi. Heidi clearly has not yet joined the company, but she will join here in the not-too-distant future. I guess the question I ask, from an organizational standpoint, now having the leader named, although not at the company, does that change what you're doing at the company now? Is now at least knowing who the CEO is going to be?

I would say we stay -- remain focused on our action plan. We're looking to have the same goals around restoring the full price health of the business. And obviously, we're pivoting based on current trends, but really trying to set the business up so that Heidi steps in, hits the ground running and builds on top of the actions that are already underway.

The next question comes from Janine Stichter with BTIG.

First on marketing, I think you said you're planning for an increase versus your previous plan this year. Maybe quantify that and help us understand where that spend is going, how you're thinking about marketing in general? And then on the unit growth, moving to the lower end of the guide, any thoughts on how you think about the return on new stores? What might cause you to go below that number at any point in the future?

Great. Thanks, Janine. So yes, we've increased our marketing investment. We are now taking it to approximately 10% to 15% above last year. So it's in the range of 6% to 6.5% of sales versus last year at 5.6%. I would say in terms of where the dollars are going, we're certainly going after activations, building on some exciting recent events, including the Great Wall yoga experience. We've got SeaWheeze coming up, which is our Vancouver Half Marathon. We'll have a pinnacle yoga event in New York City to kick off our summer series.

And then also another example would be the U.S. open activation. We'll have some collaborations coming up, continue to build on grassroots community activations, including run and yoga events locally. And then we're going to have some new experiences for press and partners, notably a pop-up in New York City, showcasing new product. And then you can look for also a new content series on our social channels with some elite athletes. And those are just a few examples of what's to come.

And then the second question you had in terms of unit growth. We did have a few stores push into '27. We continue to perform well, I would say, on our new store openings. Just a reminder, we've got 10 to 15 openings in North America. 8 of those are Mexico. So it's just a small handful of stores in the North American market. We still see return on capital of 1 year for our new stores and then 2 to 3 years for our optimizations, continue to keep a really close eye on that, and we'll continue to refine our plans for '27, but still looking to make sure we've got the right experience for our guests in each market.

The next question comes from Mark Altschwager with Baird.

On China, you talked about Chinese New Year shift adding to the Q1 growth rate. You also noted momentum slowed late in the quarter on the negative commentary before it subsided. So what's the clean underlying comp trend in China today? And as you hold the roughly 20% growth for the year with the majority of the international store openings going there, how much of that growth is comp versus new units? And then on the margin side, it looks like China is nicely accretive to the margin now. Just any updates there on how you're thinking about it?

Yes. So in terms of China, so we were tracking, I would say, above our guide for Q1 prior to the disruption. So we did come in at 30%, 23% on a constant currency basis and did have 8 points within that 30% related to the New Year shift. We're guiding Q2 in the mid- to high teens. I would say what we're viewing as the underlying trend of the business is generally in line with our full year guide at 20%, which is where we really have the second half positioned as well. From a comp perspective, we haven't broken out the full year comp, but we did have a 13% comp in Q2 relative to the 30% total top line. And yes, I would say, in terms of operating margin, still some healthy, I would say, expansion in the China market and continue to invest behind that business to drive the long-term trajectory.

Great. And then a follow-up on the product development time line. What's the gating factor to get to the 12 to 14 months that you talked about? And when does the faster speed to market translate to better comps? And then any gross margin trade-off to think about as you compress the calendar, does that reduce sourcing flexibility, just higher costs as you move the product, anything to think about there?

Thanks. I would say in terms of go-to-market, we're making good progress. There are certainly some technology unlocks that we can have over time. And obviously, those take time to implement as well as rollout. So I would say that's what we're focused on in terms of moving as quickly as we can to that faster time frame, and we're really excited about that. In terms of faster speed to market, those again, will build over time. We continue to make progress, I would say, with every delivery or every new season in terms of our speed to market. And then in terms of costs, I think there's always trade-offs in terms of speed with airfreight, but I wouldn't equate any higher product costs with our overall go-to-market time line.

The last question comes from Aneesha Sherman with Bernstein.

So you talked a lot about markdowns. I want to ask about full price sales, Andre, you said that was the primary focus. Can you update us on the timing of when you expect full price sales to turn positive given some of the challenges on new launches? And then a quick clarification, Meghan. I think you said in response to one of the other questions, high single-digit increase in reg price Q1. Does that -- is that average selling price for the non-markdown full price sales in Q1?

So I was talking about reg price, which is the same in my mind as full price in Q1. So that full price increase is high single digits for the full quarter globally. The U.S. was slightly negative, but was a meaningful sequential improvement from what we saw in Q4. In Q2, we're expecting full price sales overall to decrease in the mid-single digits given the top line trend and some of the seasonal clearance activities that we'll pursue to make sure we stay on top of inventory. When we look at the full year, our expectation is flat to slightly better in terms of full price, and I would expect that it will progress throughout the year.

That's all the time we have for questions today. Thank you for joining the call, and have a nice day.

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's Fourth Quarter Earnings Conference Call. Joining me today are Meghan Frank, Interim Co-CEO and CFO; and Andre Maestrini, interim Co-CEO, President and Chief Commercial Officer.

Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of lululemon's future. These statements are based on current information, which we have assessed, but by which its nature is dynamic and subject to rapid and even abrupt changes. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our annual report on Form 10-K and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying annual report on Form 10-K are available under the Investors section of our website at www.lululemon.com.

On today's call, Meghan will share an update on the action plan we laid out for you on our last earnings call. Andre will discuss our regional performance. Meghan will return to review our financials and guidance outlook, and then the team will be happy to take your questions.

Before I turn the call over to Meghan, I'd like to remind investors to visit our investor site where you'll find a summary of our key financial and operating statistics for the fourth quarter as well as our quarterly infographic. Also, please note that the purpose of today's call is to discuss lululemon's 2025 financial results and 2026 outlook, and we ask that you keep your questions focused on our performance.

Thanks, Howard. I'm glad to be here today to discuss our Q4 results, our outlook for 2026 and how we are executing our action plan to strengthen our brand, reaccelerate growth and create value for shareholders. Andre and I are working side-by-side with the senior leaders across our organization to drive our strategies forward to improve the U.S. business while also maintaining our international momentum and are making progress to deliver the performance we know is possible in all our regions.

We have a healthy and loyal customer base that remains engaged and looking to us for great product and experiences. We have strong teams who are motivated and excited to bring our new innovations and product assortments to our guests. And we are working across the company to refine and advance our initiatives across product creation, product activation and enterprise enablement, which Andre and I will speak more about during our call today.

We recognize there is more work to be done, and we have been course-correcting on a number of fronts, but we are encouraged by the guest response to our recent new product drops and activations. I'm grateful to our teams across the entire organization who remain committed to delivering products and experiences our guests love. Together, we are taking the right steps that will allow us to realize the full potential of lululemon.

Before I speak to our action plan, I would like to call attention to today's announcement welcoming Chip Bergh to our Board of Directors. As you likely know, Chip Bergh is the former longtime President and CEO of the iconic brand, Levi Strauss. He's a seasoned public company executive who brings deep retail and brand expertise and he has extensive experience guiding successful transformations and driving value creation at global category-defining companies. His appointment as a director comes after a comprehensive search by the Board and is part of the Board's thoughtful ongoing refreshment process that has brought 5 new directors to the Board over the last 5 years.

I'd also like to acknowledge David Mussafer, one of our long-time directors, who has informed the Board that he won't be standing for reelection. We are grateful for David's many contributions to lululemon over the years.

And with respect to the CEO search, I can share that our Board is running a robust search process and they've been meeting with highly qualified candidates. The process is moving forward, and we will provide an update on this topic at the appropriate time.

I'll now dive into three components of our action plan: product creation, product activation and enterprise enablement. During the fourth quarter, Andre and I dove deeper into each pillar of our plan and have been working with the teams across the organization to ensure we entered 2026 moving with focus and speed. We've been course-correcting where needed to restore and protect our brand health over time. A top priority for the management team as we enter the year is returning to full-price sales growth in North America. Through a series of steps that include the inflection of product newness and reducing the level of markdowns, SKU reduction and the rebalancing of inventory levels. This approach will reinforce our premium positioning that has long set lululemon apart from others while also protecting operating margin.

So let's click down into product creation. Our priorities here are raising the bar on product design, delivering a consistent pulse of innovation, improving our speed to market and ensuring a relentless focus on product quality. Hopefully, you've been in our stores and visited our e-commerce sites and have seen some of our new innovations. I will take a moment to highlight a few of these for you including Unrestricted Power, our newest iteration of ShowZero and ThermoZen.

Unrestricted power is a new training collection for women and men. It is constructed from Power Lu, our newest technical fabric innovation, which uses our highest filament-count yarn count and offers a remarkably soft feel while also providing incredible stretch and support. Guests have responded positively since the launch, and we look forward to an exciting future for this new franchise.

Next, we recently announced an updated version of our ShowZero, no-show-sweat technology meant for high-sweat activities. This newest iteration of ShowZero was developed in collaboration with professional tennis player and lululemon ambassador, Frances Tiafoe and debuted at the BNP Paribas Open at Indian Wells earlier this month. The latest technology conceals sweat while also remaining incredibly lightweight and breathable. We plan to introduce new ShowZero products to guests later this year as we continue to scale the platform across activities and categories.

And I also want to mention ThermoZen, our newest collection of insulated jackets and vests. These products offer warmth, water and wind resistance and superior softness, and are a great example of how we are leveraging our considerable expertise in developing technical apparel across our lifestyle and casual offerings. These are just some of the innovations that our team has been developing and we are encouraged by the response from guests to these offerings.

When looking at our overall product assortment, you'll see it continue to evolve based on the strategic vision of our creative team. A few specific examples of what you can expect going forward include updates on some of our key lounge and lifestyle franchises, fewer logos, a more focused and coordinated color palette and a more edited assortment of our smaller accessories. This enables us to present a more refined, uniquely lululemon product assortment.

As we introduce new and evolved product, we also recognize the importance of taking steps to further enhance and protect our product quality. I've been spending time with our supply chain team to ensure that as we shorten our go-to-market time line, we do not sacrifice on quality, maintaining the highest possible quality standards remains paramount for me and all of us at lululemon.

Shifting to product activation. It is incredibly important that we ramp up our efforts to further engage existing guests, bring new guests into the brand and ensure all guests are made aware of our latest styles and innovation. Let me highlight two of our most recent activations for you, which occurred in the first quarter.

The first is Studio Yet. This was a 3-week pop-up, high-performance training space in Los Angeles where we offered a variety of fitness classes taught by world-renowned trainers and coaches. The studio was a physical manifestation of our global Yet campaign, which focused on the relationship between going after big goals and the daily work needed to achieve them.

Guest response to Studio Yet was fantastic with all classes selling out, significant media pickup across mainstream and social channels and it, along with the community events we hosted in conjunction with the L.A. Marathon provided a halo effect and sales lift to our stores in the Los Angeles area.

And I'll also highlight the success over the past few weeks of our sponsorship of the BNP Paribas Open Tennis Tournament in Southern California, one of the most popular tournaments for players and fans. This is the first year of our 3-year sponsorship and the long lines in response to our pop-up store, where approximately 2/3s of the visitors were new to lululemon, shows the significant potential for lululemon within the tennis community. These events demonstrate that when we engage with our guests through our unique activations, we see a tangible response, and this continues to reinforce the opportunity for lululemon going forward.

When looking at our approach to integrated marketing, our plans continue to include more product-focused campaigns across social channels, which will leverage lululemon ambassadors and other influencers to help ensure our guests are aware of new styles, innovations and updates we're bringing into our assortments.

Next, I'll turn to enterprise enablement, which includes our efforts to create efficiencies and manage costs across the company. While we have always been prudent with regard to expenses, we have been particularly vigilant over the last 2 years as sales trends in the U.S. have faced headwinds and tariff policy has added pressure.

We are continuing with this vigilance into 2026, and we are targeting meaningful savings as we simplify our operations and focus on scaling more effectively while continuing to invest in key growth initiatives. Key work streams are increasing efficiencies across inventory management, supply chain and non-merchandise procurement and reducing complexity while capitalizing on automation and AI opportunities.

We know we must improve our performance in North America while continuing our momentum internationally. We have already taken decisive actions to position the business for sustainable growth. Looking forward, we have clear priorities and are moving with focus, speed and determination as we implement the strategies across our action plan. You can really feel the energy across the organization about the path forward and the team is excited about the opportunity ahead of us.

I'll now turn the call over to Andre.

Thank you, Meghan. Like Meghan, I'm pleased to be here with you all. In my role overseeing our selling channels across all regions, I have the opportunity to spend considerable time in our stores, meeting with our leaders and educators and hearing from our guests. So I'm excited to share the highlights from our markets across the globe.

Touching first on North America. We are actively making the changes needed to increase newness, enhance the guest experience in stores and online and improve our performance. We are building from a position of strength as we remain the #1 brand for women's activewear in the U.S. New guest acquisition, retention, engagement and key brand relevance metrics all remained solid in 2025. So let me speak to three of the strategies we are implementing to unlock growth in the region.

First, as Meghan mentioned, we are focused on the growth of our full-price business. Looking at 2026, a primary goal in the North America is returning the business to healthier levels of full-price sales after seeing a higher markdown penetration in 2025. We are already seeing better full-price sell-through in Q1 relative to Q4, and we are targeting further improvement as we move through the year, driven by increased product newness, innovation and operating discipline.

Second, we're enhancing the guest experience, both in-store and online. We recognize the importance of our store and e-commerce sites as guest touch points, and we are evolving the experience to better reflect the premium positioning of lululemon brand. In stores, our localization and curation enhancements continue. Our new design playbook features an elevated presentation with less density of product to better showcase our new styles and innovations and to make the stores easier for guests to navigate and shop. We are also sharpening our focus on activity-based merchandising by offering clear destination for our core activities, including run, train and yoga, pilates within the store. These destinations allow for better storytelling and improve the shopping experience for guests.

Our new store in SoHo reflects these enhancements, and we have been very happy with the guest response to these changes there and at other key locations. We will be rolling out these updates to additional doors in North America throughout 2026. And online, building on the new redesign of the site, we will continue to improve the guest journey with enhancements coming to our product display pages, checkout and overall storytelling.

And third, we are increasing new style penetration across our assortment. Meghan already spoke to our product creation pillar. So I'll just add that in North America, with our new spring merchandise that is already hitting our stores and website, we have increased our new style penetration to approximately 35%. We know that our guests are looking for new styles and product from us. And when we deliver them effectively, we see strong response. In addition to what Meghan mentioned, other examples of successful new styles include EasyFive and the Groove Wide-Leg.

Let me shift to our international business, where momentum remained strong. In China Mainland, our guests responding well to our product assortment in Q4 with outerwear and lounge being standout categories. The strength in outerwear was driven by Wunder Puff, which we feature in a localized brand campaign. More recently, we celebrated Chinese New Year with a campaign featuring world-renowned cellist Yo-Yo Ma, and offer guests the capsule collection comprised of some of our most iconic styles. This is an excellent example of how we continue to capitalize on locally-relevant events to engage with guests in unique ways.

In our Rest of the World segment now, let me highlight South Korea, one of our fastest-growing markets. Our localized approach to guest engagement, including targeted celebrity endorsement continues to resonate well, particularly among our younger guests. I would also highlight the strong response to our new store in Gangnam. This location showcases the newest expression of our brand similar to what we introduced in SoHo. It includes new design elements and detailing and acts as a hub for guests within the local community.

In Milan, we saw the lululemon brand on the global stage at the Olympics as our partnership with the Canadian Olympic and Paralympic Committees continue. These games were our third as the official outfitter of Team Canada, a natural fit for our brand and help us acquire new guests by working with and outfitting elite athletes who perform at the highest level in their respective sports.

To complete my around-the-world summary, I'll mention that with our franchise partner, the 100th lululemon store opened in EMEA in Warsaw, Poland earlier this month. This is an exciting milestone for the EMEA team and continues to demonstrate the long runway for growth within this region. The majority of stores in our international markets are company operated, but we strategically leverage our franchise model where it makes sense. Poland is a franchise market for us. And in 2026, our plans call for new franchise markets in Greece, Austria, Hungary, Romania as well as India.

Before I turn the call back to Meghan, I want to express my confidence in the opportunity for lululemon in every market around the world and I want to thank our team across our stores, distribution centers and corporate offices for your ongoing engagement with our guests and the tremendous enthusiasm you have for our brand. Meghan, back to you.

Thanks, Andre. I'll now turn to our Q4 financial review and guidance outlook. For Q4, total net revenue rose 1% to $3.6 billion. Excluding the 53rd week in Q4 of 2024, net revenue rose 6% or 4% on a constant currency basis and comparable sales increased 2%.

Within our regions and channels, excluding the 53rd week and in constant currency, results were as follows: North America revenue was flat with comparable sales down 2%. By country, revenue increased 3% in Canada and was down 1% in the U.S. In China Mainland, revenue increased 28% with comparable sales increasing 26%. Results were stronger than anticipated despite two discrete calendar shifts, which negatively impacted Q4, including earlier 11/11 events on our third-party e-commerce platform and the shift of Chinese New Year into Q1. Guests responded well to our product assortment with particular strength in outerwear and lounge. And in the Rest of World, revenue grew by 12% and comparable sales increased by 5%.

In our store channel, sales were down 1%. We ended the quarter with a total of 811 stores globally. Square footage increased 11% versus last year driven by the addition of 44 net new lululemon stores since Q4 of 2024. During the quarter, we opened 15 net new stores and completed 7 optimizations.

In our digital channel, revenues increased 9% and contributed $1.9 billion of top line. And by category, men's revenue increased 3% versus last year, women's increased 7% and accessories and others grew 4%.

Gross profit for the fourth quarter was $2 billion or 54.9% of net revenue compared to 60.4% in Q4 2024. Our gross margin decreased 550 basis points relative to last year and was driven primarily by the following: a 560-basis point decline in overall product margin, driven predominantly by tariff impact and higher markdowns. Tariffs had a gross negative impact of 520 basis points in the quarter, offset by 110 basis points related to our enterprise efficiency initiatives, while markdowns increased by 130 basis points. Deleverage on fixed cost was 30 basis points and foreign exchange had 40 basis points of favorable impact. Relative to our guidance for gross margin decline of approximately 580 basis points, the upside was driven primarily by a lower tariff impact and regional mix.

Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were approximately $1.2 billion or 32.5% of net revenue compared to 31.5% of net revenue for the same period last year. The SG&A increase of 100 basis points was in line with our guidance and relates primarily to the negative impact of foreign exchange, fixed cost deleverage and ongoing investments to build brand awareness. These were partially offset by our ongoing initiatives to prudently manage costs across the enterprise.

Operating income for the quarter was approximately $812 million, or 22.3% of net revenue compared to 28.9% of net revenue in Q4 2024.

Tax expense for the quarter was $226 million or 27.8% of pretax earnings compared to an effective tax rate of 29.2% a year ago. The decrease in the effective tax rate relates primarily to a discrete tax benefit realized in the quarter and foreign exchange. The lower tax rate relative to our guidance contributed $0.15 to EPS.

Net income for the quarter was $587 million or $5.01 per diluted share compared to earnings per diluted share of $6.14 for the fourth quarter of 2024.

Capital expenditures were approximately $183 million for the quarter compared to approximately $235 million in the fourth quarter last year. Q4 spend relates primarily to investments to support business growth, including our investments in distribution centers, store capital for new locations, relocations and renovations and technology investments.

Turning to our balance sheet highlights. We ended the quarter with $1.8 billion in cash and cash equivalents and nearly $600 million of available capacity under our revolving credit facility. Inventory at the end of Q4 was $1.7 billion, an increase of 18% on a dollar basis. On a unit basis, inventory increased approximately 6%, below our guidance for an increase in the high single digits. The difference between dollar inventory growth and unit inventory growth relates predominantly to higher tariff rates relative to last year and foreign exchange. We are pleased with the composition of our inventory as we entered the spring season, as it is more reflective of our go-forward vision for the brand.

During the quarter, we repurchased approximately 1.4 million shares at an average price of $188. For the full year, we repurchased $1.2 billion of stock.

Let me now shift to our guidance outlook for 2026. As I mentioned, we are executing against our action plan, with particular emphasis on driving healthier full-price sales in North America. We're already seeing green shoots related to our new product launches and our recent brand activations. But I want to also acknowledge that an improvement in overall trends in North America will likely progress over the course of the year and into 2027 as we return to a healthier baseline of full-price sales.

Let me also mention tariffs. For reference, in 2025, gross tariff costs were $275 million. We were able to offset approximately $62 million of this expense through our mitigation strategies, which was better than our initial expectations. Looking to 2026, we anticipate gross tariff impact of approximately $380 million with offsets from our enterprise efficiency initiatives of approximately $160 million within gross margin.

Turning to our full year 2026 guidance outlook. We expect revenue to be in the range of $11.35 billion to $11.5 billion, representing growth of 2% to 4% relative to 2025. By region, we expect revenue in North America to be down 1% to 3%, with the U.S. down 1% to 3%. Baked into our total revenue guidance for North America is an improvement in full-price sales. We are already seeing better full-price selling relative to Q4, and we'd expect positive year-over-year growth in full price to begin in Q2 and continue into the second half, driven by the rollout of new styles, innovations and core updates over the course of the year.

We expect revenue in China Mainland to be up approximately 20%, which takes into account our outperformance in 2025. Trends remained strong in Q1, and we're expecting a revenue increase of 25% to 30%, which includes a modest lift from the shift of Chinese New Year into the quarter. And in Rest of World, we expect revenue to increase in the mid-teens.

Globally, we expect to open approximately 40 to 45 net new company-operated stores in 2026 and complete approximately 35 optimizations. This will contribute to overall square footage growth in the low double digits. Our new store openings in 2026 will include approximately 15 stores in North America including 8 in Mexico and 25 to 30 in our international markets, with the majority of these planned for China. While we are taking a disciplined approach to capital spending, we continue to see good returns from new store openings and store expansions as these strategies contribute to an improved shopping experience for existing guests, new guest acquisition, building brand awareness and community engagement.

For the full year, we expect gross margin to decrease approximately 120 basis points relative to last year, driven predominantly by deleverage on fixed costs and ongoing investment in new store openings, optimizations and our distribution center network. We expect markdowns for the full year to improve modestly and tariffs to have a gross impact of 90 basis points, of which we expect to be able to offset almost all of it.

Turning now to SG&A for the full year. While we intend to realize significant savings related to the enterprise enablement pillar of our action plan, we expect deleverage of approximately 130 basis points versus 2025 as we continue to strategically invest in our business to support future growth. These investments include market expansion, improving the guest experience by enhancing our omni capabilities and growing brand awareness. We are absorbing additional costs relative to last year as we layer back in certain expenses, including incentive comp, store labor hours, and we have onetime costs associated with the expected proxy contest this year. When looking at operating margins for the full year 2026, we expect it to decrease by approximately 250 basis points versus last year.

For the full year 2026, we expect our effective tax rate to be approximately 30%, an increase from the 2025 effective tax rate of 29.5%.

For the fiscal year 2026, we expect diluted earnings per share in the range of $12.10 to $12.30 versus EPS of $13.26 in 2025. Our EPS guidance excludes the impact of any future share repurchases.

When looking at inventory, we expect dollar growth to be in the mid- to high single-digit range through 2026 with units flat to down slightly. With leaner inventories and improved chase capabilities, we are in a better position to read and react to guest demand and fuel momentum in stronger performing styles.

We continue to have $1.2 billion remaining on our share repurchase program, which we will continue to utilize. Share repurchases remain our preferred method of returning cash to shareholders, and our repurchase levels in 2026 will likely be similar to those in 2025.

Finally, for the full year, we expect capital expenditures to be approximately $725 million to $745 million. The spend reflects investments to support business growth, including capital for new locations, relocations and renovations, DC and technology investments. Our range of $725 million to $745 million is approximately 6% of revenue.

Shifting now to Q1, we expect revenue in the range of $2.4 billion to $2.43 billion, representing 1-year growth of 1% to 3%. We expect to open approximately 6 net new company-operated stores and complete 6 optimizations.

By region, we expect North America to decline in the mid-single digits with the U.S. also in that range and Canada is tracking slightly lower. We expect China Mainland to increase 25% to 30% and Rest of World to increase in the mid-teens. When looking at North America, as I mentioned, we are seeing good response to our new product launches and activations and are experiencing better full-price selling, but expect the inflection in total revenue to actualize over the course of the year.

We expect gross margin in Q1 to decrease by approximately 380 basis points relative to Q1 of 2025. This decrease will be driven predominantly by higher tariff costs, ongoing investments in store openings and optimizations and our distribution network. We expect increased tariffs to have a gross negative impact of approximately 290 basis points with offsets of approximately 110 basis points. We expect markdowns to be up approximately 30 basis points versus last year. While full-price selling has improved meaningfully relative to Q4, we expect markdowns to begin to decrease versus prior year beginning in the second half.

In Q1, we expect our SG&A rate to deleverage by 330 basis points relative to Q1 2025. This increase will be driven in part by timing related to brand activations, including the BNP Paribas Open, the Milan Olympics and Studio Yet as we have more events planned in the first half of the year versus the second half. In addition, there are discrete costs related to our proxy contest and expenses that we reduced last year that are layering back into this year related to store labor hours and incentive compensation. And we will continue to invest strategically in our growth initiatives and IT infrastructure.

When looking at operating margin for Q1, we expect it to be 710 basis points lower than 2025 for the reasons I just mentioned.

Turning to EPS. We expect earnings per share in the first quarter to be in the range of $1.63 to $1.68 versus EPS of $2.60 a year ago. We expect our effective tax rate in Q1 to be approximately 31.5%.

I want to close today by saying that since Andre and I have stepped into our interim Co-CEO roles, we focused on engaging with our leaders and employees about the opportunities in front of us as we have worked to refine and implement initiatives that are part of our action plan.

First and foremost, we are restoring the full-price health of our brand, and we are already seeing improvement in Q1. Other actions include testing a new design playbook in stores, rolling out enhancements to our e-commerce sites and working with the product teams to ensure that our design and merchandising choices emphasize athletic and technical apparel with lifestyle playing an important but supporting role. There is a renewed energy and enthusiasm across the business, in particular, where employees are seeing the product that is being introduced to guests that is in our pipeline. In fact, we've seen an increase in employee purchases as we introduce new innovations and product, which is an optimistic indicator that we're on the right path.

Andre and I are encouraged by the progress we're seeing across the business, and we're inspired by the passion and commitment of our leaders and teams across the world. All of this reinforces our confidence in what's ahead for us. We recognize that it will take some time to see the benefits of these actions, but we are confident that these are the right moves to powerfully drive our brand forward in the near, mid and long term.

We will now take your questions.

[Operator Instructions] The first question comes from Brooke Roach with Goldman Sachs.

When do you think the product assortment will be appropriate to deliver a return to an inflection in North America growth? And how are you thinking about the headwind from the removal of markdowns throughout the year and the introduction of that new full-price selling product throughout the year?

Thanks, Brooke. So as we mentioned, we are focused on reaccelerating the full-price health of our business. So in Q1, we will see a meaningful inflection relative to Q4. We expect in Q2 that we believe it would be approximately flat in full-price trend in North America and then flipping positive in the second half of the year. So that's how the year progresses.

In terms of markdowns, we are lowering that penetration. So as we mentioned, we were up 130 basis points in Q4 and up 60 in the year in 2025. For 2026, we're expecting a modest improvement in markdowns for the full year, predominantly driven through the second half, and we are expecting just a modest increase in Q1.

And just to clarify, are you seeing any improvement in your base business as you've put these new products into the assortment 1Q to date? Or is the improvement largely driven by the new product launches?

We're definitely seeing improvement to date. So we've seen a meaningful inflection in terms of full price coming out of Q4 and into Q1. And it will take us some time to inflect and we think it will be sequential throughout the year, flipping positive as I mentioned in the second half, but seeing some really great green shoots. I mentioned some of these in terms of the new innovations. We launched Unrestricted Power, ThermoZen and ShowZero, which will be commercialized later this year. We also had an exciting run capsule that launched earlier this month. So we're building on that strength as we move throughout the quarter. It's still early, but definitely seeing some positive indicators. Also would point to, we did see employee sales pick up as well over the last few weeks as we introduced new product.

The next question comes from Lorraine Hutchinson with Bank of America.

As you work to inflect the North America sales trajectory to positive, are you doing any reassessing of your marketing, either dollars spent or types of marketing outreach to try to really bring in a new customer and reignite your existing? Or is it more status quo with the activation in grassroots styles?

Thanks, Lorraine. I'd share -- I do think we're looking at our marketing strategy. So really focusing on engaging the guests, ensuring they're -- that newness is front and center and visible I think you'll see us shift more into utilizing brand-appropriate influencers and ambassadors as we move throughout the year. We are really focused on our activations and engaging with our guests through those means.

So I would say you saw some evidence of that in Q1 in terms of us being very active in, I would say, our activity activations. So with the BNP Paribas Open in Indian Wells with tennis, Milan Olympics. So really excited about the assortment that we showcased there and then also Studio Yet in L.A. We also had a Chinese New Year activation this year -- this quarter.

The next question comes from Adrienne Yih with Barclays.

Great. A couple of questions. Andre, on the 35% newness, can you talk about kind of whether that is obviously styles, which you mentioned or color choice and SKUs? And what products are you sunsetting to make room for the newness?

And then along those same lines, how does the reporting structure of who makes final decisions for quantity, make, what to chase, et cetera, within the merchandising organization? I know Elizabeth Binder reports into you, but just trying to figure out how this -- the system is working in terms of that?

And then my final question is, how much of the CapEx is AI tech-driven, like the tech stack to support AI? And how do you plan to use that and incorporate that into the business?

Thanks, Adrienne. So we are moving our newness penetration from 23% in 2025 to 35% in '26. That is, I would say, new product never seen by the guest is how I'd frame that. So it's not just new colorways on existing products. It's truly a new product.

So I would say in terms of sunsetting, we do have some SKU reduction as part of just being more pointed in our assortment and making that newness also more visible in our store and e-commerce expression. So that is a process we're going through as we assort the line.

Jonathan Cheung, who's our Creative Director; as well as Liz Binder, our Chief Merchant, both report into me, and we've been leaning in together as we make these shifts.

And then in terms of CapEx, we do have some investments in the AI space, shoring up our data and baseline so that we can move off of that. Really, I would say, our AI initiatives are focused on guest-facing, also enhancing our go-to-market calendar and supporting that speed aspect that we've discussed. So I would say it's an exciting and important part of how we're going after that enterprise enablement strategy.

The next question comes from Laurent Vasilescu with BNP Paribas.

Meghan, it was very helpful in terms of understanding the newness of 35%. But for the audience, the North American full-price realization, can you maybe just unpack a little bit better in terms of -- like I think you mentioned 1Q is better than 4Q. But in terms of percentages, where is it now versus a couple of years ago? And where do you want that to go back for 2026?

Yes. Thanks, Laurent. Yes. So if we look at 2025, we did have a higher markdown penetration than we would have liked. So it's illustrated by a 130-basis point increase in markdowns in Q4 and then 60 basis points for the year. We haven't broken out the penetrations in '26, but I would share, we expect to see a meaningful improvement in Q1. We're already starting to see that. But we are shifting from the lowest waterline in Q4. So we did have 130 basis points higher markdowns. So that points to having the most pressure on full price. So the sequential improvement is meaningful, but it will still under-index relative to our total top line.

We do anticipate it will flip flat -- around flat in the second quarter and then the second half of the year, would flip positive. We're really helping to enable this both through the newness curation as well as SKU reduction and then the way we've positioned inventory for the year. So we have positioned units flat to slightly down. So really looking to read the trends on newness and chase where that's possible. As we've mentioned before, we have developed some capabilities -- enhanced capabilities in terms of our product team's ability to chase into what's working. So we believe this sets us up well for returning to healthy full-price sales penetration for the year and building off of that for the long term and in '26 as the opportunity presents itself.

Very helpful. And then I think you mentioned that square footage should grow low double digits. Just curious, whenever we find out about the new CEO. And if that individual wants to take a fresh look at that commitment. Can you maybe just unpack that a little bit more for the audience? How much of that is committed to for 2026?

And then just a quick question here on marketing. I think in your 10-K, it's 5.7% of sales. Where should that go for 2026?

Yes. On your question, Laurent, about stores, we are taking a disciplined approach to capital spending and looking at our real estate project on a case-by-case basis. We continue to see good returns from new store openings and store expansions as these strategies contribute really to improve the shopping experience.

So for 2025 to give you a number, NSOs are returning at above 100% ROI across both North America and the international markets. So representing a payback period of less than a year. So we feel confident with that. And also the strategy of optimization of existing doors in key influential cities to bigger format with proven quality traffic is solid. The productivity of our top larger stores is higher than the average of our fleet that is one of the best in the industry with sales per square foot over $1,400.

So globally, to be precise, in '26, our plan calls for approximately 40 to 45 net new openings, which yields square footage growth to the low double digits. So with NAM, approximately 15 openings and international in between 25 to 30 openings with the majority in Mainland China. And for the marketing spending?

Yes. And I'd just add, Laurent, from a store perspective, it's really a store-by-store look that the team is doing, being really mindful of where we're opening, making sure it's relevant for the guest and we've got the right positioning in each market. As Andre just mentioned, it's 15 stores in North America, the majority of which would be in Mexico. So we have just a small handful of new store openings and we are watching them closely. We would be largely committed through '26 to our square footage expansion plans, but the team feels really confident in them.

I'd say from a marketing perspective, we are -- our guidance assumes we're relatively flat from a rate of sales perspective in terms of marketing spend. I think what you'll see is we're shifting the composition of that spend a bit more towards these impactful guest activations we discussed as well as utilizing brand-appropriate influencers and ambassadors as we move throughout this year. So I would say a little bit of a shift in strategy on the spend, same waterline, and we'll continue to monitor to the extent that it's working for us, and we'll continue to push into it. Thanks.

The next question comes from Matthew Boss with JPMorgan.

So Meghan, could you maybe speak to the bridge from 4% underlying revenue growth in the fourth quarter to the 1% to 3% in the first quarter and 2% to 4% for the year? Meaning maybe just if you could elaborate on the balance between the improvement in full-price selling that you're citing relative to what's offsetting or constraining revenue growth as we think about the course of the year.

Yes, absolutely. So Q4, we're up 6%, excluding the 53rd week. And we did guide to 1% to 3% for Q1 and then 2% to 4% for the full year. I would say it's really the ramp of full price. So we had, I would say, the lowest waterline, as I mentioned in Q4, with markdown over-penetrating. We had 130 basis points of pressure in the markdown line in Q4. So we are improving that in Q1, but it will be still negative in Q1, flipping flat in Q2 and then accelerating in the second half of the year as we continue to build into it and then lap, I would say, the markdown performance that we had in the second half of '26.

Great. And then, Meghan, just on the more than 200 basis points of operating margin contraction this year, how much of the decline do you see tied to more transitory items? And what do you see as the revenue growth necessary to see operating margins return to expansion multiyear?

Yes. So we guided to 250 basis points decline. I would say the majority of that, when you step back from it, is add-backs of incentive comp and labor that we reduced in '25 and then also the proxy contest expenses. That's the majority of it as you step back. Obviously, we've got some headwinds and tariffs, but we're largely offsetting the year-over-year within the year.

I do see this as the low waterline that we'll continue to build upon as we transition into '27. So really looking at getting back to that healthy full-price baseline. We're obviously having a little pressure on the fixed components of our P&L based on that revenue waterline of 2% to 4%. We haven't put a fine point on the leverage aspect. I think it will depend on the trajectory of the business, and then there are some decisions that we can make in terms of investment levels. So we'll definitely share more on that, but definitely expect it to improve from here.

The next question comes from Paul Lejuez with Citi Research.

Lots of focus on the North America full-price improvement, but I'm just curious if we should read that as you guys being happy with full-price selling in the Rest of World and China. Maybe can you talk about how those regions compare from a full-price penetration perspective to the Americas? And then also maybe match that with what sort of level of newness do you see in those regions? Have the percentages also gone down? And are they also supposed to go back up in '26? Or has it been more constant there?

Thanks, Paul. I would say we have not seen the headwind, we've seen in North America, in international regions in terms of full price. So still happy with the levels we're seeing there. That said, we do believe that the steps we're taking in our action plan in terms of product creation and activation will benefit all regions. But I would say we're still pleased with the trends there. I'll pass it to Andre just to add some more color on what we're seeing in the regions.

Yes, absolutely. I think that the model that has been developed to grow and expand in international is working because it generates full attention on the full price. And let me call out the different layers, which is, first, a brand-first approach, we are building the premium position of lululemon in activewear market in those key regions.

Second, a diversified portfolio of product across the different activities where we want to lead in. Then this obsession of full price and minimal discounting and markdown. And also an elevated presentation in our stores and the guest experience across not only the key doors but also our online experience.

And we are staying true to our community grassroot approach. We also keep standout events that generate organic traffic like the Summer Sweat Games, for example, in China. And that's why we are importing as a playbook to do Studio Yet that Meghan, you mentioned or our participation in the open of Indian Wells are new categories that we want to expand. So yes, as said, everything we are working on developing new styles and newness at the global level will also benefit all our markets to keep driving the focus and engaging the guest on full-price realization.

The next question comes from Michael Binetti with Evercore.

Could you speak a little bit to the Canada slower sales outlook in first quarter? Is that something you're seeing today, Meghan? Maybe just a few thoughts there. That market has been trending better than the U.S. for a little bit. I'm just curious what you're seeing in that market.

And then maybe you could just help us -- you're shortening the time line on design from go-to-market. I think you diagnosed that as a pretty long time frame, 18 months plus. It's been a big focus for you. Could you just give us an update on what you're seeing there and some of the early progress or opportunities to shorten the lead times and what you think maybe that could go to as you look to kind of speed up the go-to-market process here?

Yes. Thanks, Michael. So in terms of Canada, we're expecting -- we are inflecting full price across the North America region. The Canadian consumer has been a little bit more sensitive to markdowns. So we're seeing a little bit more of a pronounced impact there, I'd say. So that's what's driving that differential, but expect still the same opportunities in terms of assortment shift and focus on guests with our activations and think we'll reset to a better waterline.

And then in terms of the go-to-market calendar, so we are going from about 18 to 24 months, we're expecting we could go to closer to 12 to 14 months over time. Really focused on tools, process and systems and leaning into automation, including in the AI space to lean into that calendar. We did mention that we have a new Head of Technology who's got an AI focus. We're excited about him joining the team and the things that we can unlock in that space. And there's -- I would say, a lot of energy in the business around this reduction and simplification of our process.

Okay. And maybe if I can ask one follow-up. I think as I look back at last year, if I look at the first quarter, you mentioned that traffic was a little weaker than you'd liked in the quarter and the high-value guest was weak as well. You kind of gave us that breakout. Is that -- are you seeing better traction with the high-value guests as you start to flow the newness in and you start to get some confidence in the full-price selling as you at least start to improve sequentially from the fourth quarter here?

Yes. I'd say it's early in the quarter. I'd like a little more time just to understand what's going on with the high-value guests. But I would say we're seeing, as I mentioned, great green shoots on some of the new product launches. And I would expect that extends to that guest as well. So we'll share more on what we're seeing as it progresses.

The next question comes from Dana Telsey with Telsey Group.

Nice to see the progress. As you think about the performance apparel market, and just the activewear market. Did you grow share this quarter? Did it stay the same? What do you see in the growth of premium athletic and in performance apparel?

And then with the early results, positive results to the new assortments coming in, is it bottoms? Is it tops? And what are you learning from that as you develop new products, but for the next time line for the balance of the year?

Thanks, Dana. In terms of market share, so we maintained share in the total apparel market, and we lost about less than 1 point in activewear. So that's where we stand on that. As Andre mentioned, we maintained our position as the #1 women's activewear brand in the U.S.

In terms of what's trending for category, tops and bottoms, we're seeing, I would say, some nice performance across both. The Unrestricted Power innovation, I mentioned we did in women's tights and men's shorts as well as a top, seeing some nice performance there. ThermoZen also was an outerwear innovation that we're excited about as well. We did also see some great performance out of a couple of bottoms that Andre mentioned, so EasyFive and then Groove Wide-Leg. And then we had a run capsule, which I would say encompass both tops and bottoms.

So I would say it's both. And that had a lot of, I would say, energy around it in terms of fun and excitement in that run capsule. I think the team is really energized on building on the learnings in terms of what's working continuing to chase into as well as looking at how it informs our creative direction for upcoming seasons.

The last question comes from Ike Boruchow with Wells Fargo.

Meghan, can you just comment on the inventory ending in 4Q. How comfortable are you with that? I know the markdown is still expected to be up a little bit, but maybe just some more anecdotes there? And then what's your expectation for inventory as you move into 2Q and kind of the rest of the year?

Great. Yes, I would say we're pleased with both the level and composition headed out of Q4. We guided to unit increase in the high single digits, and we came in up 6%, so cleaner than we expected. We did focus on cleaning out seasonal inventory and feel we're headed into '26 with an assortment that's more reflective of our go-forward strategy.

In terms of how we're managing inventory in '26, I would say, throughout the year, we'd expect to see units approximately flat to slightly down. That would hold true for the end of Q1 as well. So that is part of how we're supporting driving that full-price inflection in our business and the return to a healthier baseline in terms of penetration.

That's all the time we have for questions today. Thank you for joining the call, and have a nice day.

Thank you for standing by. This is the conference operator. Welcome to the lululemon Athletica Inc. Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon Athletica. Please go ahead.

Thank you, and good afternoon. Welcome to lululemon's third quarter earnings conference call. Joining me today to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO.

Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of lululemon's future. These statements are based on current information, which we have assessed but by which its nature is dynamic and subject to rapid and even abrupt changes.

Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the Investors Section of our website at www.lululemon.com.

Before we begin the call, I'd like to remind our investors to visit our investor site where you'll find a summary of our key financial and operating statistics for the third quarter as well as our quarterly infographic. Today's call is scheduled for 1 hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed.

And now I would like to turn the call over to Calvin.

Thank you, Howard. It's good to be here with all of you today. In just a few minutes, Meghan and I will provide an overview of our results for the third quarter, our performance over the Thanksgiving weekend as well as an updated guidance for the fourth quarter and full year.

But let me begin with sharing more about the news that after more than 7 amazing years, I will step down from my role as CEO of lululemon on January 31. In my conversations with the Board, we carefully considered what's ahead for the company and for my own journey. Together, we agreed that the timing is right for a change as we near the end of our 5-year plan cycle. I'm incredibly proud of what we have accomplished together over the past 7 years. lululemon is a very different and much stronger company today than when I first joined the organization in August of 2018.

I enjoy helping organizations set big, ambitious goals and growth targets and working towards achieving them. Since 2018, lululemon tripled its annual revenue, and we expect to generate $11 billion this fiscal year.

We have broadened our global reach from 18 to over 30 geographies and grown the company's China Mainland business into our second largest market. We expanded the horizon for what's possible for lululemon, quadrupling our international business, growing our men's business as well as our online channel and extending into new categories and activities. And I am proud we are the #1 women's active apparel brand in the United States. We have done this while increasing our profitability.

Based on our guidance for 2025, we will achieve a compound annual growth rate in EPS of approximately 20% from 2018 to 2025. And the company has strong cash flow and a balance sheet with $1 billion in cash and no debt. So lululemon is in a very good position going forward.

But beyond the numbers, there is so much opportunity ahead for the company, which is poised to innovate new products and experiences and welcome more markets and guests. The teams have been addressing opportunities head on and making meaningful progress from product creation and activation to enterprise efficiency. And we've got a leadership team in place that is ready to author the next horizon of what's possible.

Together, we built a foundation of innovation, creativity and connection at lululemon that has transformed the athletic apparel industry and will continue to drive it forward.

As you've seen in our press release, Marti Morfitt will serve as Executive Chair, Meghan and Andre Maestrini will serve as co-CEOs, supporting all aspects of the business until the next CEO steps into their role.

I will continue to serve as an adviser to the company through March of next year to support a smooth transition and assist the leadership team on executing against our business strategies, and I look forward to sharing more about my next chapter. I appreciate the support of our Board of Directors, our management team and everyone at lululemon for their support over the past 7 years.

As we step into this transition period, I am confident in the company's senior leaders, and I know that Meghan and Andre will do an extraordinary job. This leadership team will play an important role in creating the future for lululemon. I believe the outstanding product pipeline we have built and the action plan now in place will yield positive results going forward. I cannot wait to see it come to fruition and deliver value to shareholders in the months and years ahead. I've described being CEO of lululemon as my dream job. It truly has lived up to every expectation and given me the opportunity of a lifetime.

With that, Meghan and I will now share more about our business results. I'll speak to our Q3 results and then discuss our performance over the Thanksgiving weekend, which was encouraging. Next, I will turn it over to Meghan to build upon the foundation we laid out on our Q2 earnings call regarding the action plan to drive inflection in our U.S. business. And Meghan will then share our detailed Q3 financials and our Q4 outlook before we take your questions.

So let's begin with quarter 3. When looking at our U.S. business, our guest metrics remain consistent. We continue to see growth in both total and retained guests, and we are acquiring new guests and retaining existing guests across all age demographics. Where we continue to have opportunity is increasing the frequency of visits and spend with our high-value guests.

In the Americas, in Q3, we saw total revenue decline 2% with the U.S. down 3% and Canada negative 1%, in line with our expectations. From a product standpoint, we continue to lead with technical innovations and saw growth in our performance activities led by run and train. Guests also responded well to our outerwear assortment with performance up strong double digit.

Shifting to international, where our momentum remains strong, revenue increased 33%, fueled by 46% growth in China Mainland and 47% on a constant currency basis. Our Rest of World segment also saw nice momentum with revenue growing 19% in constant currency.

Looking forward, we now expect revenue in China Mainland to be at or better than the high end of our range of 20% to 25% revenue growth for the year, excluding the 53rd week. For Q4, we expect revenue growth to be below the Q3 trend due to calendar shifts, which benefited Q3 and will have a negative impact on Q4.

In our Rest of World segment, I would highlight the recent Gangnam store opening in Seoul, South Korea and the strong guest response we've seen in the initial weeks. This store reflects our new design ethos that celebrates our Pacific Northwest heritage while modernizing the in-store experience. And in EMEA, our franchise partner recently opened the third lululemon store in Istanbul, and we have plans to enter several additional markets in 2026.

Let me now share some highlights from Thanksgiving. We're pleased with our performance over the Thanksgiving shopping period. I traveled with Carla Anderson, our new GM of North America and other members of our leadership team to several stores over the weekend and saw our educators in action, bringing our brand to life and providing guests with a seamless shopping experience.

Our final stop was our new SoHo location. This store offers improved visual merchandising and adjacencies and offers a truly elevated shopping experience. Given the competitive environment, we know guests are looking for value. With the increased traffic over the holiday period, we had the opportunity to clear through some seasonal and end-of-life product, which helps position us well from an inventory standpoint as we exit quarter 4 and enter spring. We also dropped new full-price product, including special edition training gear, which met with good guest response.

And relative to last year, we offered our Black Friday product to our members a week earlier this year. Not only did this help drive traffic to our e-commerce sites, but also fueled a significant number of app downloads and new sign-ups for our membership program. Despite the earlier start, Black Friday was still our biggest volume day ever on our e-commerce sites.

I also want to acknowledge we have seen trends slow a bit since Thanksgiving, which we've taken into account in our Q4 guidance. However, despite this, we expect revenue trends in the U.S. in Q4 to be modestly improved relative to Q3.

Before I turn it over to Meghan, I want to take a moment to speak to the 3 pillars of the action plan underway to drive an inflection in the business. We are focused on product creation. I've been working with Jonathan Cheung, our Creative Director and our design and innovation teams on our product pipeline.

As I've shared, we know that our current merchandising mix, particularly in North America, does not fully reflect the go-forward vision we have for our brand. The team has been in the work, and I believe that we have a strong pipeline of innovation and approach to new style creation.

You'll see the impact of this work beginning in spring 2026 and continue to strengthen throughout the year. Product activation, where we are improving the in-store and online experience, engaging our high-value guests in new ways and better aligning our brand and marketing activities with product inflections and drops, and enterprise efficiency, ensuring we are operating as efficiently as possible as we work to inflect the U.S. business, particularly in light of the new tariff environment. We believe these priorities position us well for the near term and will continue to set lululemon up for long-term sustainable growth. Meghan, over to you.

Thank you, Calvin. I'm grateful for your leadership over the last 7 years. It has been a privilege to be part of your team during your tenure to see how you immediately made an impact on this organization to go after and deliver against some incredible goals. I appreciate your support as we step into this transition.

I'm excited to partner with Andre Maestrini as Interim Co-CEO and to work closely with Marti Morfitt in her expanded role as Executive Chair. In addition, I have full confidence in our entire leadership team as we guide lululemon through this important period.

Let's now spend a few minutes on the details of our action plan we have in place to drive improvement in the U.S. As you know, our teams are focused on inflecting our business. On our Q2 earnings call, we laid out actions we have in place. And today, I'd like to share with you a more formal framework for the strategies underway and add some details to our prior discussion.

At the highest level, the goals of our plan are simple. We are working to drive acceleration in our U.S. business, maintain momentum in our international regions and protect operating margin in the near term and drive improvement over the long term. We began this work last year as we saw the U.S. business slow, and we expect to see the most significant benefits of our work streams in 2026.

As Calvin mentioned, we are executing against 3 pillars, which are product creation, product activation and enterprise efficiency. We believe this plan will enable us to deliver improved differentiated products to our guests, allow our teams to read and react more quickly based on style performance, elevate our in-store and online experience and refine our marketing approach to ensure new and existing guests are aware of the products and innovations coming in 2026.

Let's now get into the details beginning with product creation. Our teams have been in the work to reenergize our product engine, bring a new energy into our assortment and increase our speed and agility. So let me give you a few examples. We are increasing the frequency and breadth of new styles and remain on track to bring new style penetration to 35% next spring. The teams have already begun this work with some recent examples being Milemaker, Shake It Out, Tumbled Fleece and Scuba Waffle. In addition, we recently debuted our Team Canada kit for the Milan 2026 Winter Olympic Games.

Looking forward and under the direction of our design team, we will be updating several of our key franchises while also maintaining a strong pipeline of new innovations across our performance offering. We'll have a focus on train coming in early 2026, and we'll be bringing newness and novelty across some of our most important franchises, including Swiftly, Daydrift and Steady State.

Next, we're increasing our speed to market. Our mainline product development process currently runs 18 to 24 months, and we are working to reduce it to 12 to 14 months. In addition, we've been enhancing our speed lanes. This includes our chase capabilities, which will allow us to get back into select strong performing styles within 6 to 8 weeks and also our fast-track design process.

Finally, it's important to keep in mind that the assortments you currently see in stores and online include certain styles that are not representative of our go-forward vision for the brand. There are many elements that we like and our guests are responding well to. However, as we said on our last call, we've let product life cycles run too long within some of our key franchises. And we have not inspired our high-value guests to purchase as we had in the past.

I'm looking forward to 2026 as we will begin to see the excitement our creative team is bringing into our assortments. In addition, given our improved agility, we'll be better able to read, react and adjust our assortments based on guest response to our offering.

Shifting now to our second pillar, product activation, where we have several initiatives underway. First, we are elevating the store experience by improving our ability to curate our assortment by store and by market. In May of this year, we began testing an updated approach to the in-store experience and have seen good initial results.

Our intention is to use these learnings to enhance our ability to have locally relevant assortments in all stores. The strategy goes beyond assorting stores based on climate differences alone, and we'll be better able to maximize the impact of our assortments through strategic curation, which takes into account local guest taste.

We plan to reduce the density of our assortment on a local basis to better highlight styles that are most relevant. This will enable improved visual merchandising for the styles we know are most important to the guests in each local market. And we are working to improve our in-store storytelling by shifting product to adjacencies and category flow to ensure the guest is seeing the versatility and coordination across our assortment.

Second, we're improving our digital experience. We recently rolled out a website redesign with enhanced visual merchandising and elevated storytelling, offering an overall more modern guest experience to inspire purchase and increase conversion.

Next, we're rolling out new solves to engage our high-value guests. We have several initiatives underway to get at this objective, but there are 2 timely ones I'd highlight for you. These include the updates we've recently rolled out to our membership program and our new partnership with the Amex Platinum Card.

Finally, under the product activation pillar, our brand building and marketing activities will continue as we invest in integrated marketing efforts around the world with a planned focus on driving awareness and excitement for both product newness and innovation across all athletic activities as well as lifestyle. We will leverage our ambassadors as well as brand right creators and talent with a sharp focus on engaging guests through social channels and community activations.

The final pillar of our action plan is enterprise efficiency. This work stream is not new for us, however, in a world with higher tariffs and the removal of the de minimis provision. And while we work to inflect the U.S. business, we have a heightened focus on ensuring we're operating as efficiently as possible across the enterprise.

As we've said, we're taking actions in both the near term and long term to mitigate the increased tariff costs. These include strategic pricing actions, supply chain initiatives, including vendor negotiations and DC network efficiency and enterprise-wide savings initiatives. I will also note that we benefit from strong cash flow generation and a balance sheet with $1 billion in cash and no debt. This enables us to keep our eye on the long term and prudently invest in our growth initiatives while navigating the near term.

Let's now turn to our financials and guidance outlook. Starting with Q3. For Q3, total net revenue rose 7% to $2.6 billion on both a reported and constant currency basis. Comparable sales increased 2%.

Within our regions, results were as follows: Americas revenue decreased 2% on both a reported and constant currency basis with comparable sales down 5%. By country, revenue decreased 3% in the U.S. and was up 1% on a reported basis and flat on a constant currency basis in Canada. China Mainland revenue increased 46% or 47% in constant currency, with comparable sales increasing 25%. Better-than-expected guest response to our merchandise assortment, particularly outerwear, coupled with an earlier start to 11/11 events on our third-party e-commerce platforms contributed to this above-plan performance.

And in the Rest of World, revenue grew by 19% on a reported and constant currency basis with comparable sales increasing by 9%. In our store channel, total sales were flat, and we ended the quarter with 796 stores globally. Square footage increased 12% versus last year, driven by the addition of 47 net new lululemon stores since Q3 2024. During the quarter, we opened 12 net new stores and completed 16 optimizations.

In our digital channel, revenues increased 13% and contributed $1.1 billion of top line or 42% of total revenue. By category, men's revenue increased 8% versus last year, women's increased 6% and accessories and other grew 12%.

Gross profit for the third quarter was $1.43 billion or 55.6% of net revenue compared to 58.5% in Q3 2024. The gross profit rate in Q3 decreased 290 basis points and was driven primarily by the following: a 290 basis point decrease in overall product margin driven predominantly by the tariff impact and higher markdowns. Markdowns increased 90 basis points. In addition, foreign exchange had a 10 basis point unfavorable impact.

There were several smaller items within gross margin, the net of which contributed 10 basis points of positive impact. Relative to our guidance for a decline of gross margin of approximately 410 basis points, the upside was driven predominantly by leverage on higher-than-expected top line, lower net tariff impact and prudent management of the fixed expenses within gross margin.

Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were $988 million or 38.5% of net revenue compared to 38% of net revenue for the same period last year. This was favorable to our guidance for deleverage of approximately 150 basis points driven by top line leverage and prudent management of expenses.

Operating income for the quarter was $436 million or 17% of net revenue compared to 20.5% of net revenue in Q3 2024. Tax expense for the quarter was $135 million or 30.5% of pretax earnings compared to an effective tax rate of 30.2% a year ago.

Net income for the quarter was $307 million or $2.59 per diluted share compared to $2.87 for the third quarter of 2024. Capital expenditures were approximately $167 million for the quarter compared to approximately $178 million in the third quarter last year. Q3 spend relates primarily to investments to support business growth, including our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments.

Turning to our balance sheet highlights. We ended the quarter with $1 billion in cash and cash equivalents. Inventory increased 11% and was $2 billion at the end of Q3. On a unit basis, inventory increased approximately 4%, below our estimate for an increase in the low double digits.

Lower-than-expected inventory was driven predominantly by higher-than-planned sales and timing of receipts. The difference between dollar inventory growth and unit inventory growth relates predominantly to higher tariff rates relative to last year and foreign exchange.

We repurchased approximately 1 million shares at an average price of $181 during the quarter. Including the recently approved $1 billion increase to our authorization, we now have approximately $1.6 billion in capacity to repurchase shares.

Let me now share our updated guidance outlook for the full year 2025. We now expect revenue to be in the range of $10.96 billion to $11.05 billion. This range represents growth of 4% relative to 2024. Excluding the 53rd week that we had in the fourth quarter of 2024, we expect revenue to grow 5% to 6%.

By region, excluding the 53rd week and on a constant currency basis, we continue to expect the U.S. to be within our guidance range of negative 1% to 2%. We continue to expect the Americas to be flat to down 1% and Canada to be flat. We now expect China Mainland to be at or above the high end of our guidance range of 20% to 25%, and we now expect Rest of World to be up in the high teens.

When looking at China Mainland, Q3 results were strong and ahead of our expectations. However, let me remind you that there are 2 discrete calendar shifts, which will negatively impact Q4, namely the early start of 11/11 events, which benefited Q3 and a later Chinese New Year relative to last year. As a result, we expect revenue growth in the fourth quarter to be below the Q3 trend. We expect to open approximately 46 net new company-operated stores this year and complete approximately 36 optimizations. We expect overall square footage growth in the low double digits. Our new store openings in 2025 include approximately 15 stores in the Americas, with 9 of those openings planned in Mexico.

The remainder of our new stores are planned for our international markets, the majority of which will be in China. While stores remain an important part of our omni ecosystem, we acknowledge that revenue trends in the U.S. are not where we'd like, and we are closely looking at all potential store openings as we plan for 2026.

For the full year, we now expect gross margin to decrease approximately 270 basis points versus 2024. Relative to our prior guidance for a 300 basis point decrease, the improvement is being driven by lower estimated tariff impact. We now expect markdowns to be approximately 70 basis points higher than last year.

Turning to SG&A for the full year. We expect deleverage of approximately 120 basis points versus 2024, above our prior guidance of 80 to 90 basis points. While we continue to manage expenses prudently, we're investing further in marketing in Q4 to help drive traffic and continue to build brand awareness.

When looking at operating margin for the full year 2025, we now expect a decrease of approximately 390 basis points versus 2024, in line with our prior guidance. For the full year 2025, we continue to expect our effective tax rate to be approximately 30%.

For the fiscal year 2025, we now expect diluted earnings per share in the range of $12.92 to $13.02 versus our prior guidance of $12.77 to $12.97 and EPS of $14.64 in 2024. Our EPS guidance excludes the impact of any future share repurchases, but does include the impact of our repurchases year-to-date. We expect capital expenditures to be near the low end of our $700 million to $720 million range in 2025.

Shifting now to Q4. Looking at Q4, we expect revenue in the range of $3.5 billion to $3.59 billion. This represents a range of negative 3% to negative 1% relative to 2024. Including the 53rd week that we had in the fourth quarter of 2024, we expect revenue to grow 2% to 4%. We expect to open approximately 17 net new company-operated stores and complete 8 optimizations in Q4.

We expect gross margin in Q4 to decrease approximately 580 basis points relative to Q4 2024. The decrease will be driven predominantly by the impact of increased tariffs and the removal of the de minimis exemption, deleverage on fixed costs and our ongoing investment in store growth and our multiyear distribution center project.

The impact from tariffs and de minimis combined will be approximately 410 basis points. We expect markdowns to be 100 basis points higher than 2024. In Q4, we expect our SG&A rate to deleverage by approximately 100 basis points relative to Q4 2024. This will be driven predominantly by increased foundational investments and related depreciation and strategic investments, including those to build brand awareness.

When looking at operating margin for Q4, we expect deleverage of approximately 680 basis points with 410 basis points related to tariffs and de minimis.

Turning to EPS. We expect earnings per share in the fourth quarter to be in the range of $4.66 to $4.76 versus EPS of $6.14 a year ago. We expect our effective tax rate in Q4 to be approximately 30%.

When looking at inventory, we expect units to increase in the high single digits in Q4, with dollar inventories up in the high teens due in large part to the impact of higher tariff rates and foreign exchange. As we look out to next year, we are planning inventory units below sales. Our aim is to increase full price penetration and utilize our chase capabilities to minimize markdown risk.

And with that, I will turn it back over to Calvin.

Thank you, Meghan. I want to conclude my remarks for this earnings call by expressing my deep appreciation to the leaders and teams across lululemon. I have so much confidence in what you all will achieve going forward. This has been an extraordinary experience for me over the past 7 years, and I look forward to supporting our leadership team over the coming months as we work to deliver for our shareholders, our guests and for each other in both the near and long term.

With that, we'll open it up for questions.

[Operator Instructions] The first question comes from Matthew Boss with JPMorgan.

So in the U.S., could you speak to the cadence of demand that you saw in the third quarter, elaborate on trends quarter-to-date, maybe notably the slowing trend that you cited post Black Friday. And just larger picture, the time line that you see is reasonable for the product assortment to be fully optimized as we look to next year?

Thanks, Matt. I would say in terms of U.S. demand, the quarter progressed pretty much as we expected. We did come in line with our Q3 expectation. The best month was August, the softest month was October, but that was planned just based on some activities last year and did come in overall in line with expectation.

In terms of quarter-to-date, we're really pleased and saw a strong Thanksgiving period result. We have seen some pullback in demand post Thanksgiving in terms of traffic. We've reflected that in our guidance. And then in terms of the longer picture, we are, as we mentioned, focused on activating the newness that we have in the assortment as we move into Q1. We'll start to see the benefits of that in Q1 in terms of getting our newness penetration up. And then we're also leaning into those activation pieces we mentioned in terms of ensuring we get eyeballs in terms of marketing on that newness in our assortment across all of our channels in terms of stores and e-com.

Great. And then, Meghan, just taking all that into account on the product assortment changes, are there any puts and takes for us to consider as we model operating margins relative to this year? Any reinvestments for us to think about maybe as it relates to your comments on experience and activating newness as you outlined as we think about next year?

Yes. There will be some puts and takes in terms of margin as we look into '26. And obviously, we'll offer more color as we get into March, see some initial results in response to our assortment. We will have a full year of increased tariffs and the removal of the de minimis provision, offset, obviously, by the actions the team is taking to mitigate those expenses, and we have been making some good progress there. We will need to layer in back some certain expenses we reduced in '25, including incentive comp. And we're going after, I would say, expense savings overall and looking for efficiencies across the business. Bottom line, I would say that the negative factors would outweigh the positives as we move into '26, but the team continues to work on the efficiency side, and we'll give an update in March there.

The next question comes from Dana Telsey with Telsey Group.

As you think about the segment, how did the segment perform this quarter versus how you performed? And then as you think about the newness that's flowing in, which segments should we be seeing first, what are you thinking about bottoms, about tops, about men's and women's? Any more clarification on that? And what are you looking for in the new CEO? What are you looking for in the new leader as you move forward?

Thanks, Dana. I'll take the first 2 parts of the question. In terms of the flow-through and what we've seen in the overall marketplace, we continue to see sort of pressure in the apparel space. We held share in premium athletic and lost some slight share in the performance apparel as we see guest behavior and trading down.

From a newness perspective, I'm pleased with the innovation pipeline and what you've seen and we'll see this quarter in terms of some of the updates to franchises like Scuba, in lounge, BeCalm, Big Cosy, Loungeful are new introductions that are performing well and in performance, the Milemaker as well as Shake It Out.

And as you know, as we head into spring, we're moving our new style penetration to 35%. That's going to be a balance of both innovation behind our performance active categories where we continue to see growth through Q3 as well as some other new items and new innovations across lifestyle. And we're going to be kicking off the year with the train campaign followed by some new introductions to some of our core franchises, including Scuba, Swiftly and ABC that the team is excited about.

And in terms -- Dana, in terms of the CEO, the search has begun. The Board intends to do a thorough process and really focused on a leader with experience in growth and transformation.

The next question comes from Adrienne Yih with Barclays.

Yes. Calvin, thank you for all the hard work over the years and all the successful strategies in place going forward. I guess let me start with kind of the new product pipeline and the things that you'll be doing. How much of that new product has been sort of informed from primary research and from the customer directly?

And then, Meghan, can you talk about kind of price increases, what you've done season to date and any additional price increases for spring? And you had mentioned kind of maintaining operating margins or supporting them at current levels for next year. Can you give us a little bit more color on what that entails? And best of luck, Calvin.

Thank you, and thank for the best wishes. From a product innovation perspective, our process always begins with research, really focusing on solving for the unmet needs. And I believe the pipeline has a lot of those solutions, both across our activity as we continue to put our performance activity categories initiatives first across run, train, yoga, golf and tennis. You'll see a lot of innovation across all 5 of those activities in the yoga category as well we're kicking off, as I mentioned, train.

And we have a new performance fabric that's specifically designed for weight training that we're excited for. And then there's the ongoing updates to our core franchises as we've addressed and looked and using data to really look at our high-value guests into our core franchises and opportunities to bring newness and refresh those swiftly, some updates, our ABC pants for him as well as building on the success of Waffle Scuba seeing opportunities to innovate. So the team definitely focuses and targets using both our own data of our guest behavior as well as research with our ambassadors and collective community as to where the opportunities are.

And in terms of pricing, we haven't taken any other further pricing actions relative to what we discussed last quarter. So we took a small amount of the assortment up modestly. We've been pleased with the price elasticity on those actions, I would say, in line with our expectations from a revenue and margin perspective. It's an area we continue to keep our eye on, closely monitoring where the competitive landscape goes, but no imminent plans to go further there.

In terms of 2026 operating margin, it is fair to assume that the negatives will outweigh the positives. The margin push though will be a multiyear effort looking at efficiencies. It will be our first full year of tariffs, and we are looking for offsets. The team has been making some progress there. But I would assume we have some pressure next year, and we will be focused on it from a multiyear perspective.

The next question comes from Brooke Roach with Goldman Sachs.

Calvin, Meghan, I was hoping you could speak to the performance of your largest franchises, both in the performance category and in lounge and social. Are these businesses large enough that you think that they warrant a reset in order to let the new product innovation shine and the new design language pop out to the consumer in a bigger way in '26 and beyond? And what proof points in the new design language are you currently seeing that gives you confidence that the new styles launching in '26 will change the trend rate that you're seeing in the U.S. today?

Thanks, Brooke. In terms of the overall focus of the team, it's definitely balanced across our activity areas of run, train, yoga, golf and tennis, with some lifestyle. And when we look at the core franchises today, as I've shared, we continue to see growth across our performance activity categories. And we have innovation behind those categories as well as next year as that is definitely our leading strategy. So you'll see innovation in our bottom legging business. You'll see innovation across our top business, all geared towards these key activities and unmet needs of our athletes.

And then on the lifestyle side, we continue to see growth in social, both on the back of the newness that we have brought in, Daydrift being a good example. And we have additional innovation next year in our men's bottom business, updating the ABC and bringing that silhouette as well for her that the team is excited about with some new fabric innovation.

And then lounge, which has been our core franchises where we've seen the greatest headwind. We can see that updating Scuba with new materials and silhouette changes, we see great response. So the team is leaning and doing more of that as well in China, Mainland China, we activated it and saw great results. So we know even internationally, a lot of these core franchises, although in North America, they have more saturation internationally and globally, they don't yet. So it's a balance to make sure we continue to drive the growth there and then reinvent here in North America.

And that really brings us to the overall balance and solution that the consumer is bringing. To your last point, Meghan mentioned, there's a lot of work going on in terms of in-store visual merchandising. We have some small tests going on in L.A., Miami, they are very much focused on exactly what you said, curating the stores, de-assorting, taking product out so that we could put focus on the newness and the guests can see that. And we're seeing very good results, and we're excited and plan to roll that out. That would be a key initiative so that our guests in the physical space can see the newness better than today.

And online, with the launch of our new web design, the teams have a lot more levers than they've ever had before through guest navigation and storytelling to put the newness front and center in front of the guests. And there, we're already seeing good results as well in terms of the adoption and the visibility to the newness. We'll continue to play those levers into the next year as the new product comes.

Our next question comes from Lorraine Hutchinson with Bank of America.

I was hoping to hear more about the Amex partnership. Can you quantify the impact to sales and margins? And then talk about, if it attracted a new or reengaged guest in line with your expectations?

Great. Thanks, Lorraine. I'll take the first -- or the second part of your question and then hand it over to Meghan. But from an expectation point of view, we've been pleased with it. We went in similar to some of these partnerships and initiatives we do, very much focused on guest acquisition and being able to grow both our men's guests as well as our female guest. And I would say on this partnership, although it's early, we're pleased with the results in the number of new guests that we've seen come through this partnership.

Yes. And I would say in terms of the numbers, it's a relatively small part -- exciting part, a small part of our business. We haven't broken out specifics. But I would say we're pleased overall with the profitability of the program. We do have a share in the credits, and that is a reduction to revenue.

The next question comes from Michael Binetti with Evercore.

Let me add my congrats, Calvin, to the next step. I think, Calvin, you did mention there are some signs of trade down in third quarter. I was just curious if you had any additional thoughts that you could share there and if that adds anything to your thoughts on using pricing as a lever for the mitigation efforts as we go forward. And then I guess as we look at the next year, I know you guys have been working on some of the multiyear DC projects for a while. I think there's a pretty big one in Canada that you've been working on for a long time that was scheduled to come online next year. There's been some questions about whether maybe that was originally intended to be used for some of the de minimis business. And I wonder if that's something you have to reposition on at this point or how you're thinking about that distribution center.

Thanks, Michael, and thanks for the best wishes. I'll take the first part. Meghan will take the DC network configuration. And in terms of the -- sorry -- yes, sorry, in terms of trading down, we've seen a bit of that behavior throughout the year. I've talked about the uncertain behavior of the consumer we're seeing. We're seeing a little bit in terms of how they're responding to the promotional activity in the marketplace today, and they're definitely looking for ways in which they can save in value. And it's behavior we've seen throughout the year and continued into Q3.

And I would say in terms of pricing, we've been really strategic with the pricing moves we've made. As I mentioned, we're pleased with that -- with the elasticities we've seen and are in line with our expectations from a sales and margin perspective. So I don't see any concern there related to what Calvin just mentioned. And again, we'll take that same stance as we move forward on an item-by-item basis.

In terms of the DCs, I would say, given the news on de minimis, the team is deep in the work on evaluating the network. I don't think it means we won't have a presence in Canada, but I do think it means some changes to our DC network, and we will make sure we're as most efficient as possible. I think we can share more as we move into '26 and the team is further along in that work stream.

The next question comes from Paul Lejuez with Citi.

Curious if you could talk a little bit more about the China business, what you saw in e-comm performance versus stores. And also curious how you would characterize the athletic apparel market in China in general? And if there are any big differences by city tiers?

Thanks, Paul. In terms of the performance of our business in China, and obviously, as the results indicate, we continue to see very good momentum, very pleased with the overall results. There were a couple of timing opportunities and shifts to platform activations that helped us in the quarter. But on those, when we activate, we show up as a brand with the least amount of discounting. We actually have a large number of reg sales as a percentage of our business. We were able to use that event to activate Scuba.

And as you know, we also have a lower outlet to store ratio, and we use these channels as a means to exit some of our markdown products. So those levers and that mix works well for that market. And obviously, we were really pleased with the overall results. We also saw very good success to our outerwear business, which is a very key important category within that market. And we continue to see guests respond very well to both existing Wunder Puff and styles as well as our new innovation, the Featherweight and other styles and silhouettes that we bring out.

Overall, we're definitely gaining share, gaining momentum in that marketplace, and the team there is executing very well. And we're seeing success across all tier cities. And we definitely, as we enter into the Tier 2, Tier 3 deeper, see the business and the brand continue to resonate and perform well.

The next question comes from Brian Nagel with Oppenheimer.

First off, Calvin, best of luck. It's been a pleasure working with you.

Thanks, Brian.

So with the leadership change, we've been talking for a while now about product refreshes and particularly a lot of new products set to hit in early '26. So I guess I want a 2-part question. I mean, does the leadership change, change the timing or any aspects of those product launches? And then I guess the follow-up, and I think this may be a bit of a follow-up, but I mean, what are you seeing now as far as consumer reception to the new products you have introduced? Are you -- is there a marked difference in how the consumer is reacting to those products versus some of your legacy items?

Great. Thanks, Brian. In terms of the team and confidence in the work that they've been working on for the past year, there's no change, and this shouldn't be perceived in terms of any lack of excitement and work that, that team has been creating. As I shared, I think, early on, the first season spring when I go back from -- to spring of this year, and we had all our regional teams in, the energy in the room was contagious and exciting. There is enthusiasm for the newness that's coming and shifting that mix to 35%. And there's work the team still has to do as we work and offset the life cycle of some of our core franchises. And that's the work they will continue to be in and have been in as the year progresses from season to season.

And relative to the newness, no change. We continue to see newness, what we believe to be future core items drive outsized growth in the U.S. and we're seeing our high-value guests as well as all of our guests respond and react well to those. And we know as a mix that is increasing next year, and that's just not the existing styles, but it's more styles to come. So overall, the batting average on the newness is very good, and the guest response is very strong, encouraging, pleased with that and encouraged that we have more of that as a composition of our mix moving forward. And the teams are focused on the areas where they're going to continue to offset where we see some of the headwinds.

The next question comes from Jay Sole with UBS.

My question is on the co-CEO structure that exists now. Calvin, given your transition and Celeste transition, who is design reporting to, who is merchandise reporting to, who's ultimately going to make the final decision on what happens in terms of product and what gets made and what goes into the stores?

Thanks, Jay. First of all, it's a very strong leadership team that I have huge confidence in. And in terms of the co-CEO structure, Andre taking on the Chief Commercial Officer role and being able to provide his leadership globally to our markets and to our GMs will really continue in that capacity and excited to have him work with Carla and the North American team and bring new perspective and new insights and sharing from some of the other global markets where we've seen momentum and success. And the other team members will report to Meghan through the search process. So product, both merchandising and design will report into Meghan as well as brand.

And we've operated as a team of peers and challenging each other. And I expect and know that, that will continue to be the dynamics and look forward to how they continue to drive the business forward. What I would want to just remind you of is the dates. A lot of the decisions around design, product merchandising, the team has made, in particular, through the first half of next year. The teams are just completing the winter buy for '26. So the work has happened and a lot of that foundation is in place as the search occurs. So I think the team will work and execute the plans to the action plan that Meghan laid out, both on how to activate and leverage a lot of the test and learn initiatives that are underway. But a lot of the solid plans are in place to create the inflection that I know they've been working towards.

The next question comes from Janine Stichter with BTIG.

Good luck to you, Calvin. A question for Meghan, just on the puts and takes as we think about margins next year. Can you speak to how you're thinking about markdowns? They came in a little bit higher than expected in Q3. It looks like they step up a bit in Q4. Maybe talk about what you saw there. And then as you talk about aiming to increase full price penetration next year, just speak to your confidence in that? And is that more of something that we would see in the back half? Or could we see that as early as the first half?

Thanks, Janine. So this year, as you know, sales haven't met our expectations, and therefore, we have more seasonal inventory that we're clearing through, and that's reflected in our markdown expectations. As we started planning next year, we are taking a more conservative posture on inventory. We will manage inventory units below our sales plans in an effort to mitigate markdown exposure and use those chase capabilities I described to chase the trend on the upside. I would expect and we're planning for that dynamic to start in Q1. That said, we have multiple scenarios if the trend ends up being different than we think. But we are definitely taking, I would say, a more conservative prudent posture in terms of inventory management.

The next question comes from Mark Altschwager with Baird.

Calvin, best wishes for your next chapter. My question is for Meghan. I just was hoping we could zoom in specifically on the tariff de minimis piece. Last quarter, you gave us some dollar figures for gross and net this year and next year. It sounds like you're making some progress. I guess where are you seeing the progress? And would you be willing to share some updated figures on how you're thinking about the gross net impact both this year and next year?

Yes. Thanks, Mark. So we -- our outlook has improved this year in terms of tariffs. So we had 220 basis points of pressure on an annual basis in our last guidance. We've updated that to $190 million. It's about $210 million net impact. When we think about next year, we offered a $320 million number. We're not giving a specific number update there. As I mentioned, we are making progress. I would say some of the areas we're working on still are in the vendor negotiation space as well as our DC network and inventory placement to offset some of those costs as well as just efficiencies across the business. There will be some puts and takes in terms of next year's operating margin that we went through, and we're really focused on inflecting the business. So we'll give you more of an update there in March in terms of our operating margin perspective for next year.

That's all the time we have for questions today. Thank you for joining the call, and have a nice day.

Thank you for standing by. This is the conference operator. Welcome to the lululemon athletica inc. Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] The conference is being recorded. I would now like to turn the conference over to Howard Tubin, Vice President, Investor Relations for lululemon athletica inc.

Thank you, and good afternoon. Welcome to lululemon's Second Quarter Earnings Conference Call. Joining me today to talk about our results are Calvin McDonald, CEO; and Meghan Frank, CFO. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements reflecting management's current forecast of certain aspects of lululemon's future. These statements are based on current information, which we have assessed, but by which its nature is dynamic and subject to rapid and even abrupt changes.

Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with our business, including those we have disclosed in our most recent filings with the SEC, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today, and we expressly disclaim any obligation or undertaking to update or revise any of these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our quarterly report on Form 10-Q and in today's earnings press release. In addition, the comparable sales metrics given on today's call are on a constant dollar basis. The press release and accompanying quarterly report on Form 10-Q are available under the Investors section of our website at www.lululemon.com.

Before we begin the call, I'd like to remind our investors to visit our investor site where you'll find a summary of our key financial and operating statistics for the quarter as well as our quarterly infographic. Today's call is scheduled for 1 hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I would like to turn the call over to Calvin.

Thank you, Howard, and welcome to our quarter 2 earnings call. As you've seen from our press release, while EPS this quarter exceeded our expectations, revenue fell short of our guidance, and we are reducing our revenue and earnings expectations for the year. While we continue to see positive momentum overall in our international regions, we're not happy with the current results in the U.S. business. lululemon has been in a period of hyper growth for several years, more than tripling our revenue in just 6 years, and we have successfully managed through a number of market shifts.

We are facing yet another shift today within the industry related to tariffs and the cost of doing business. The increased rates and removal of the de minimis provision have played a large part in our guidance reduction for the year. As we navigate current market dynamics, I see an opportunity to reset some key areas of the business as we continue to drive long-term growth. During our time together today, I will provide an update on our business and my perspective on the near term as we continue to plan and adapt for the future.

Specifically, I will share my insights on the state of the U.S. business, our assessment of our current product offering, what we've learned has worked and what has not worked and the actions our teams are taking to reaccelerate growth in the U.S., my perspective on our strength globally and the opportunities this continues to create for our brand going forward and the impact of the new trade environment, implications of higher tariffs and the removal of the de minimis exemption on our revised guidance. Finally, we'll conclude by taking your questions. So let's begin.

As I speak to the U.S., I'd like to set some context for you. During the second half of last year, our teams were focused on bringing our newness penetration back to historical levels. We achieved this, as we shared last quarter, through a combination of new styles and an increase in seasonal color within our core styles. While the guest is responding well to many of our new styles, they are not reacting as we had anticipated to the updated seasonal colors we brought into our core assortment.

Given this, we have recently conducted a deeper product diagnostic, the results of which I will share with you today. I now believe we have let our product life cycles run too long within many of our core categories particularly in lounge and social. We have become too predictable within our casual offerings and missed opportunities to create new trends. At the same time, we are seeing shifts within the industry. The overall market for premium athletic wear in the U.S. remains challenging with declines continuing in quarter 2.

Consumers are spending less on apparel overall, spending less in performance active wear and are being more selective in their purchases, seeking out truly new styles. This makes it even more important that we meet and exceed the expectations of our guests. For further context, let me provide some additional details on what we are seeing is working well and what is not working well within our product assortment. Our brand-building initiatives and several of our new product innovations are working. In addition, we continue to see growth in our performance apparel.

Within our brand initiatives, our brand health continues to be strong with growth in both total and retained guests, and we continue to acquire new guests and retain existing guests across all age demographics. In addition, our membership program continues to build and now has approximately 30 million members. Within product, our guests continue to respond well to many of the new styles and innovations we bring into the assortment, including The Align No Line, Daydrift and BeCalm.

By leveraging our Science of Feel product development platform, our view is that these offerings demonstrate the impact of our approach to innovation and our ability to solve the unmet needs of our guests. We also continue to differentiate lululemon from our competition with our performance apparel, and we're seeing continued growth overall across our key activities, yoga, run and train, golf and tennis. As you know, performance apparel is a key differentiator for us in the marketplace and an important launch pad for us to showcase innovation.

And importantly, we have continued to gain market share within performance apparel even as the sector has declined according to the latest Circana market share data for the U.S. activewear space. So we know that we have a very loyal guest who continues to trust and prioritize the brand for their high-performance apparel needs. And when we deliver new innovation across the assortment, they respond and are ready to purchase. However, on the other side of the equation, let me now turn to what we believe has not been working well based upon our recent diagnostic.

Our lounge and social product offerings have become stale and have not been resonating with guests. Specifically, we have seen a less enthusiastic response to some core franchises across lounge and social, such as Scuba, Softstreme and Dance Studio. And we feel that our opportunity remains in frequency and conversion, which is impacting their total spend. The data related to engagement and loyalty of our guests remains strong. My view now is that we have relied on the same product playbook across certain categories for too long.

The competitive landscape is different today than it was even 2 or 3 years ago. And while no single competitor is having a meaningful impact on our business, there are now many players in the market. This makes it imperative that we are consistently better and stronger than ever and create the right balance of our core product and new styles across our merchandise mix. Let me zoom out and speak to what we now see as the root causes of our current product challenges in the U.S.

The primary cause is that we relied too heavily on some of our core franchises across lounge and social for too long. We did not have the appropriate balance between existing and new styles across our casual offerings and the guests stopped responding as they had in the past. I would also mention as a secondary cause that in the current environment, we have the opportunity to create more agility within our go-to-market process to allow us to go faster, to test new styles and to react to guest demand.

We introduced several great new styles this spring but couldn't chase into the demand quick enough unless some of our guests disappointed. Our teams are now focused on increasing the number and frequency of new styles we bring into the assortment and rebalancing our go-forward merchandise mix. I will now share details about the actions underway to elevate our product assortment and to improve how our teams continue to work to support our growing business. My view is that it's now time to reset many of our practices related to how we develop and create the range of products that will fuel the next phase of our growth.

We have seen that when we get our product right, everything else can follow. lululemon is a beloved brand with deeply loyal guests who have come to expect unparalleled product from us in terms of design, fabrication, innovation and newness. And I'm excited by the work of our Global Creative Director, Jonathan Cheung, who joined us early last year. In this time, he has built a strong team of lead designers for men and women who are infusing new energy into the lululemon product playbook. This is an essential investment in our future, both in terms of time and talent.

Some areas of focus for our new design team include maintaining our momentum in performance activities, designing into several new products across lounge and social and giving a fresh perspective to some of our most iconic items. As a result of their work, we intend to increase new styles as a percentage of our overall assortment from the current 23% to approximately 35% next spring. We will continue to gauge guest behavior and adjust this penetration in future seasons based upon their response.

We are also enhancing our capabilities to go faster within our go-to-market process. By working with our vendors, we have and will continue to improve our ability to chase into strong performing styles outside of our mainline product development process. We have also improved our fast-track design capabilities, which reduces lead times by several months for select styles. These have been fully incorporated into the upcoming seasons to give us added flexibility to anticipate, meet and potentially exceed guest response and demand.

And through these actions, we expect to create the anticipated improvements in our product portfolio and business performance with the most meaningful impact beginning in 2026. I would also like to speak to the recent announcement that Ranju Das has joined lululemon as our new Chief AI and Technology Officer. This is a new role at lululemon and represents an elevated mandate to enable AI and technology to help expedite our product innovation process, improve our agility and speed to market and increase personalization across our guest experience.

I'm excited Ranju has joined us, and I look forward to partnering with him as he and our technology teams implement and accelerate these strategies. These plans create a clear path forward and are intended to create a better balance across our product assortment, reaccelerate our business in the United States, and we feel these will also benefit each market where we operate. Our teams have been working with the right sense of urgency and focus, and I'm excited about the enhancements we're making to some of our existing capabilities and the new ones we are developing to set up our next phase of growth.

I want to also touch on our international business, where our momentum remains strong overall and where our market expansion efforts continue at a steady pace. In China, our second largest market, total revenue increased 25% or 24% in constant currency. We opened 5 new stores in China Mainland this quarter, and we continue to drive brand awareness through a variety of activations and experiences, including our fifth annual highly visible summer sweat games.

In our Rest of World segment, total revenue increased 19% and 15% on a constant currency basis. We continue to open new markets as part of our growth plans, including our new company-operated store in Italy, in Milan as well as franchise locations in Turkey and Belgium. And looking ahead, we announced the selection of our franchise partner for India with the goal of opening our first lululemon store in this market in the second half of 2026. We remain in the early stages of international growth and are seeing success across all our markets.

The opportunity to drive unaided awareness, gain market share and grow our guest base is significant. And while our growth rates remain strong, I expect the changes I just detailed for you in the U.S. will benefit our business across all these important markets as well. Before I turn it over to Meghan, I'd like to speak more about the macro environment and specifically the reality of the new tariffs and the removal of the de minimis provision. Companies across our industry are looking at various levers to navigate this period, including opportunities across their supply chains, expense management and strategic pricing actions. We are doing the same. However, realizing additional benefits will take time.

And given our financial strength and profitability, I am determined that we will not make any near-term decisions that could hurt or damage our brand positioning over the long term. For the year, we now expect revenue growth of 4% to 6%, excluding the 53rd week in 2024 and EPS to be in the range of $12.77 to $12.97. These reductions relative to our prior expectations are being driven predominantly by North America. In the U.S., we now expect a 1% to 2% decline in revenue. And in China, we anticipate growth in the 20% to 25% range. We continue to expect Rest of World will grow approximately 20%.

When looking at China, quarter 2 revenue came in at the low end of our expectations as we're beginning to see some signs of macro-driven headwinds in Tier 1 cities. We have adjusted our guidance for the year to factor in this continued performance. Looking out to 2026, I believe the product plans discussed today will benefit our business in China as well, given the importance of lounge and social products in this market. Meghan will share more with you on our revised guidance in just a few minutes.

In summary, I see this period as an opportunity for lululemon. We have a brand people love with extremely loyal guests who respond well to our new styles and innovation. And we are clear on the path forward to meet and potentially exceed the expectations of our guests. I believe we will leverage our financial strength and once again demonstrate our agility to navigate this period while we steadily make progress on the product opportunities discussed today.

We have learned a lot as a leadership team this year, and we are a stronger organization as a result. I expect to see the most impact of our learnings and insights into 2026 and beyond. With that, I will now hand it over to Meghan.

Thanks, Calvin. While Q2 earnings per share exceeded guidance, our top line results fell short of our expectations, driven predominantly by underperformance in North America. As you heard Calvin say, we have opportunity within our product assortment and the teams are in action on bringing in style newness, differentiation and increased agility. And you'll see the most meaningful impact of this work in 2026. In addition, we are navigating increased costs related to tariffs and the removal of the de minimis exemption.

Given these factors, we believe it's appropriate to be prudent in our planning and financial outlook for the remainder of the year. We are taking actions in both the near term and long term to mitigate the increased tariff costs, including strategic pricing actions, supply chain initiatives, including vendor negotiations and enterprise-wide expense savings initiatives. While implementing these cost-saving strategies, we do not plan to take our eye off the long-term growth potential for lululemon.

Given the strength of our balance sheet and strong cash flow generation, we will continue to invest strategically in our growth initiatives to help ensure we realize the full potential of our brand while also navigating today's dynamic environment. I'll share our detailed guidance with you in a moment, but let's first take a look at our Q2 results in detail. For Q2, total net revenue rose 7% or 6% in constant currency to $2.5 billion. Comparable sales increased 1%.

Within our regions, results were as follows: Americas revenue increased 1% on both a reported and constant currency basis with comparable sales down 3%. By country, revenue increased 1% in Canada on both a reported and constant currency basis and was flat in the U.S. China Mainland revenue increased 25% or 24% in constant currency, with comparable sales increasing 16% and in the Rest of World, revenue grew by 19% or 15% in constant currency with comparable sales increasing by 9%.

In our store channel, total sales increased 3%, and we ended the quarter with 784 stores globally. Square footage increased 14% versus last year, driven by the addition of 63 net new lululemon stores since Q2 2024, which includes 18 locations in Mexico. During the quarter, we opened 14 net new stores and completed 6 optimizations. In our digital channel, revenues increased 9% and contributed $1 billion of top line, 39% of total revenue. And by category, men's revenue increased 6% versus last year, women's increased 5% and accessories and other grew 15%.

Gross profit for the second quarter was $1.48 billion or 58.5% of net revenue compared to 59.6% in Q2 2024. The gross profit rate in Q2 decreased 110 basis points and was driven primarily by the following: an 80 basis point decrease in overall product margin driven by higher markdowns and tariff impact. Markdowns increased 60 basis points versus our expectations of 20 to 40 basis points, 40 basis points of deleverage on fixed costs and 10 basis points of favorable impact from foreign exchange. Relative to our guidance for a decline in gross margin of 200 to 210 basis points, the upside was driven predominantly by favorable mix, lower ocean freight costs, prudent management of fixed expenses, lower-than-expected tariff impact related to timing and a stock-based compensation accrual reversal.

Moving to SG&A. Our approach continues to be grounded in prudently managing our expenses while also continuing to strategically invest in our long-term growth opportunities. SG&A expenses were approximately $952 million or 37.7% of net revenue compared to 36.8% of net revenue for the same period last year. This was favorable to our guidance for deleverage of 170 to 190 basis points due predominantly to the stock-based compensation accrual reversal. Operating income for the quarter was approximately $524 million or 20.7% of net revenue compared to 22.8% of net revenue in Q2 2024.

Tax expense for the quarter was $162.6 million or 30.5% of pretax earnings compared to an adjusted effective tax rate of 29.6% a year ago. Net income for the quarter was $371 million or $3.10 per diluted share compared to $3.15 for the second quarter of 2024. The stock-based compensation reversal added $0.15 to Q2. Excluding this reversal, EPS would have been above our guidance range of $2.85 to $2.90. Capital expenditures were approximately $178 million for the quarter compared to approximately $145 million in the second quarter last year. The increase relates primarily to timing of store openings.

Turning to our balance sheet highlights. We ended the quarter with $1.16 billion in cash and cash equivalents. Inventory increased 21% and was $1.7 billion at the end of Q2. On a unit basis, inventory increased approximately 13% and was in line with our expectations. The difference between dollar inventory growth and unit inventory growth relates predominantly to higher tariff rates relative to last year and foreign exchange. We repurchased approximately 1.13 million shares at an average price of $247 during the quarter. At the end of Q2, we had approximately $860 million remaining on our $1 billion repurchase program.

Let me now share our updated guidance outlook for the full year 2025. We now expect revenue to be in the range of $10.85 billion to $11 billion. This range represents growth of 2% to 4% relative to 2024. Excluding the 53rd week that we had in the fourth quarter of 2024, we expect revenue to grow 4% to 6%. By region, we now expect revenue in the Americas to be flat to down 1%, with the U.S. down 1% to 2% and Canada approximately flat. China Mainland to be 20% to 25%, and we continue to expect Rest of World to be approximately 20%. Our updated expectations for the Americas and China Mainland take into account the most recent trends we're seeing in those regions.

Looking out to 2026, we would expect all markets to benefit from the product-driven strategies we are currently implementing. We now expect to be at the high end of our 40 to 45 range for net new company-operated stores in 2025 and complete approximately 35 optimizations versus our prior guidance of 40. We expect overall square footage growth in the low double digits. Our new store openings in 2025 will include approximately 15 stores in the Americas with nearly half of those openings planned in Mexico. The remainder of our new stores are planned for our international markets, the majority of which will be in China.

We remain pleased with our new store productivity and the results we are seeing from our optimization strategy. While we are taking a disciplined approach to capital spending, we continue to see positive returns from new store openings and store expansions as these strategies contribute to an improved shopping experience for our existing guests and new guest acquisition, along with building brand awareness and community engagement. For the full year, we now expect gross margin to decrease approximately 300 basis points versus 2024.

Relative to our prior guidance for a 110 basis point decrease, we expect the additional 190 basis points decrease to be driven predominantly by increased tariffs, including the removal of the de minimis exemption, offset somewhat by several of our enterprise-wide efforts to mitigate these costs. We now expect markdowns to be approximately 50 basis points higher than last year versus our prior expectation of 10 to 20 basis points. This change reflects higher levels of seasonal clearance but does not contemplate a change to our markdown and promotional strategy.

We will continue to clear end of season and end-of-life product through our normal channels, including in-store, online, our outlets and from time to time in the past, we've utilized warehouse sales. Let me provide some additional details on the increased tariff expense, which now includes 2 components: higher reciprocal rates and the removal of the de minimis exemption. Our prior guidance assumed a mitigated impact of 40 basis points for the year based on 10% incremental tariffs on most countries where we source and 30% on China.

As rates in total have actualized higher and the de minimis exemption has been removed, we now expect a 220 basis point or approximately $240 million mitigated impact on gross margin for the year. This impact reflects our best estimate, recognizing the actual effect could vary depending on how conditions evolve and our mitigation efforts perform. In terms of de minimis, given that we have DC infrastructure in Canada, we have been well positioned to ship some of our e-commerce orders to our U.S. guests. As most of these shipments were under $800, they qualify for the de minimis exemption, and we realized meaningful duty savings.

This removal will have a significant impact on our gross margin and represents approximately 170 basis points of the 220 basis point tariff-related decline we now expect for the year. Keep in mind that in 2025, based on timing, we are only benefiting from half a year of mitigation strategies. As we look out to 2026, while offsetting all the incremental de minimis expense will not be possible, we will benefit from a full year of mitigation and expect an approximate $320 million net impact on operating margin related to both higher tariffs and the removal of de minimis.

Turning to SG&A for the full year. We now expect deleverage of approximately 80 to 90 basis points versus 2024, modestly above our prior guidance of 50 basis points. While we have implemented several enterprise-wide cost savings initiatives, the modest increase in deleverage is driven by the impact of lower top line, FX headwinds and ongoing investments into our Power of Three x2 road map, including investments to support market growth and international expansion and continued investment in technology.

When looking at operating margin for the full year 2025, we now expect a decrease of approximately 390 basis points versus 2024. As I mentioned, 220 basis points of the decrease is driven by increased tariffs and the removal of de minimis. For the full year 2025, we continue to expect our effective tax rate to be approximately 30%. For the fiscal year 2025, we now expect diluted earnings per share in the range of $12.77 to $12.97 versus EPS of $14.64 in 2024. Our EPS guidance excludes the impact of any future share repurchases, but does include the impact of our repurchases year-to-date.

We now expect capital expenditures to be approximately $700 million to $720 million in 2025 versus our prior estimate of $740 million to $760 million. This reduction reflects our discipline with regard to capital spend and relates to investments to support business growth, including a continuation of our multiyear distribution center project, store capital for new locations, relocations and renovations and technology investments.

Shifting now to Q3. Looking at Q3, we expect revenue in the range of $2.47 billion to $2.5 billion, representing growth of 3% to 4%. We expect to open approximately 14 net new company-operated stores and complete 18 optimizations in Q3. We expect gross margin in Q3 to decrease approximately 410 basis points relative to Q3 2024. The decrease will be driven predominantly by the impact of increased tariffs and removal of de minimis, deleverage on fixed costs and our ongoing investment in our multiyear distribution center project.

The impact from tariffs and de minimis combined will be approximately 230 basis points. We expect markdowns to be 80 basis points higher than 2024, driven by increased seasonal clearance. In Q3, we expect our SG&A rate to deleverage by approximately 150 basis points relative to Q3 2024. This will be driven predominantly by increased foundational investments and related depreciation and strategic investments, including those to build brand awareness. When looking at operating margin for Q3, we expect deleverage of approximately 560 basis points with 230 basis points related to tariffs and de minimis.

Turning to EPS. We expect earnings per share in the third quarter to be in the range of $2.18 to $2.23 versus EPS of $2.87 a year ago. We expect our effective tax rate in Q3 to be approximately 30.5%. When looking at inventory, we expect units to increase in the low double digits in Q3, with dollar inventories up in the low 20s due in large part to the impact of higher tariff rates and foreign exchange. We expect a similar dynamic in inventory growth for the remainder of the year.

As we look out to next year, we aim to manage our inventory in line with sales trends, and we would expect our inventory growth on a unit basis to moderate beginning in Q1 2026. Before turning it back over to Calvin, I would emphasize that while there are external factors we are navigating, we know we can perform better, and we have several initiatives in place to reaccelerate our business, particularly in the U.S.

Looking out to 2026, I believe we will see improvements in our product assortment when we have the full impact of our new creative team. In addition, we'll continue to work on and pull levers to navigate the new realities of higher tariffs. I will reiterate that while we're managing the near-term dynamics, we have the flexibility to keep our eyes on the future and continue to prudently and strategically invest in our growth potential.

However, we are planning for multiple scenarios, and we continue to look across the enterprise for ways to operate more efficiently, including expense management, capital spend on square footage growth and inventory management. And with that, I will turn it back over to Calvin.

Thanks, Meghan. We look forward to taking your questions in just a moment. As you heard me say, we are not satisfied with the results for the quarter, and we know our brand can and will perform better than these results. We are clear on our assessment of the situation, which takes into account the current dynamics within the consumer environment and competitive landscape. We are learning and adapting and are focused on the path forward to create and deliver product that lives into our high-performance and high-style philosophy.

I feel confident in our leadership team and the plans we have in place. The guest is responding well to many of our new styles. Our future pipeline is strong and the positive impact of our new design vision remains in front of us. We will navigate this period successfully given the passion, commitment and agility of our leaders and teams. We will now take your questions.

[Operator Instructions] The first question is from Janine Stichter with BTIG.

Would love to hear more about the product assortment changes you're making. First, I would love to hear about how you can impact the back half. It sounds like there's a lot of expectations around the first half of next year. But what should we expect to see in the back half of the year? And then maybe help us understand how much of the assortment, this casual piece where you're seeing the slower sales trend, how much of the assortment is that? And what gives you confidence that this is the piece that needs to be fixed?

Janine, in terms of the product pipeline, the team is focused really across 3 key areas supported by innovation and solving the unmet needs of our guests. The first is maintaining momentum in the performance activities, as I mentioned, those apparel categories are positive and growing through the quarter, and we want to continue that. Team is focused on designing into several new styles across lounge and social. We do have in the back half 2 new items launching Loungeful and Big cozy. And then third is continue to give a fresh perspective to some iconic items that we know our guests love. And the Scuba waffle that was launched a few weeks ago is a good example of that.

Through the back half of this year, there is more new styles than we had in the first half. And as I mentioned, the spring 2026 has really been the focus of Jonathan since he joined last year and the team in bringing that new fresh energy across the product playbook, and we're very excited about these new styles and what we're seeing relative to the assortment and that mix of newness moving from 23% to 35%. From a casual perspective, it's about 40% of the mix, 60% is performance.

On that performance, as I mentioned, sales are positive across those 5 key activities. And then within casual, there are new styles that are performing well, Daydrift, BeCalm and there are core franchises like Scuba, Softstream and Dance Studio, where we're seeing fatigue with the consumer, particularly our high-value consumer who's been with us longer. And that's the split of the sales and where we're seeing some of those product headwinds within that casual mix of the assortment.

Great. And then maybe just a follow-up on tariffs. I'm curious what you've seen so far with some of the price increases you've taken. And it sounds like you're cautious on raising price, but just would be curious if the recent increase in tariffs change your view on pricing into next year at all.

Thanks, Janine. So we are instituting modest price increases on a small portion of our assortment as we discussed last quarter. What's reflected in our guidance is still that positioning. We continue to look at pricing. I would say those actions are in the process of rolling out, and we're pleased with them to date, but some still in front of us. We'll continue to look at it as a lever as we move through the second half of this year and into next.

The next question is from Alex Straton with Morgan Stanley.

Perfect. Maybe a follow-up. Just on that lifestyle point of being 40% or so of the assortment. Is that the right mix, do you think over time? And are there any differences by geography? And then just separately, just on the performance versus casual kind of deviation. It just feels like the performance franchises are longer dated versus like your later entry into casual. So I'm just a little bit surprised by the fatigue there. So any color or thoughts on what's different would be helpful.

In terms of the right mix, I do think a 60-40 split. It's what we've historically seen is a good benchmark. We'll let the guest sort of judge based on the new styles that we bring as well as I've shared before, we have plans to continue to develop into the activity strategy where we see opportunity. We have a very good position in run and yoga. We see an opportunity to continue to gain market share in train, golf and tennis, not just in North America, U.S., but around the globe.

So as we innovate and lean into those, we see that driving growth. And on the casual side of the business, it really is split between social and lounge. Social has been an opportunity for us in our women's assortment. Daydrift is a good example of us playing with that high-performance high-style blend. There are new styles planned for that. And we've had a very strong lounge business supported by some of these key franchises that, as I mentioned, are doing well with newer guests and our high-value guests that have these in their wardrobe are looking and reacting more to new, and we have new lounge coming.

So the 60-40 split, I think, is a good starting position for us, but we're constantly learning and adapting as we introduce new styles, we'll continue to do that through improved agility. Relative to growing in performance versus casual, we have a number of franchises in both of those segments that I would say, vary depending upon length of time. Within performance, because of the very nature of the fabrics and the innovations and solving the unmet needs of our guests, we've been able to update and provide a variety of variations as well as continue to bring in new solutions.

So it has been new styles and new innovation that has driven a lot of that growth and success that we're seeing, especially in some of the newer activities for us. So I'm not surprised that we're seeing and able to generate growth on that side of the business. And on the casual, it is attributed to some of these core franchises that we've had for a while that she's responding less to the core seasonal color interpretations and obviously to new and updates to those like the Scuba waffle that I mentioned when it is truly something she has not seen before responding well.

The next question is from Brooke Roach with Goldman Sachs.

Calvin, I was hoping that you could contextualize the magnitude of these key franchises that are down trending within the 40% of your business that is casual. How are you thinking about the time line that it might take for new innovation to scale in your spring '26 innovation pipeline to a large enough magnitude in which that newness will fully offset the incremental pressure that you're seeing from these select lounge and social platforms?

Thanks, Brooke. When we look at the merchandising mix heading into spring and the shift from 23% to 35%, that will be new styles that the guest has not seen and I would say that slightly over-indexes into the areas of opportunity we've seen, which has been social and lounge, plus the newness that we've introduced this year that she has responded well to, Daydrift, the BeCalm franchise, plus those that we have coming, which Big Cozy, Loungeful being a couple of those.

I feel that the mix is good to offset to give the guest choice and options around some of those core franchises. And we're obviously going to test and learn. And one of the key areas that I also mentioned is the agility to be able to chase into quicker the items that are successful. But I do think the mix of the assortment allows us to have the right new style and learn and see how the guest responds to it.

The next question is from Jay Sole with UBS.

Calvin, you talked a lot about supply chain initiatives in your prepared remarks, specifically around speed and getting faster. Can you talk specifically about how much faster lead times need to get where they are today, where you really want to take them ultimately? And how you're going to manage that process of getting a company that's worked one way for a really long time around creating product, both in line and innovation into doing something really sounds pretty different.

Yes. Thanks, Jay. The teams have been in that work, and we've been able to improve our go-to-market calendar over the last few quarters with plans to continue to be able to adapt how they work. A couple of examples is aligning at the beginning of the season across our supply chain with our vendor partners and our merchants, some of the key new items and fabrics and having our vendor base pull in some of those fabrics so we can move more quickly into action when we see and get a read from our guests.

We've improved the ability to adjust within the process from a PO and a cut and sew into a different style or into a different silhouette depending upon, again, the read of the guest. So it is definitely a new way of working. It has been an area and focus for the team because we're excited about the new styles that we're bringing. We're excited about the percentage of our merchandising mix. And obviously, we know that agility and our ability to react quickly is an important muscle and the teams have been focusing on that, working both with vendor partner themselves.

Equally, and as I mentioned, Ranju joins in a new role, which I'm very excited about, which really is a continuation of the focus that we put on our processes and technology to enable the teams to be able to have the right tools and processes to support this change and to move more quickly. And he'll be an important partner to the teams in driving that and leveraging technology to move even quicker.

Got it. And then if I could just ask a little bit about marketing because you mentioned, I think, in the prepared remarks that if you get the product right, everything else kind of takes care of itself. But are there -- is there anything you feel like you can do with on the marketing side? Would you be willing to increase marketing as a percent of sales to maybe create some more traffic in the store and more excitement around the brand?

We don't have plans to increase. It's 5% of our revenue. Plan is to maintain that. We definitely continue to test and learn, but lean into our grassroots community, local with some event activations. And we're pleased with the engagement and the guest metrics on a year-to-date basis. Our brand remains very healthy, and our guests are very loyal, as you know. And when I look at the guest data, we've continued to grow our guest base in the U.S. across all age demographics through the quarter and year-to-date.

And within our most recent guest cohort, those that are in our low to mid-spend range, all are spending more with us year-over-year. opportunities are high-value guests. They're over-indexing on new styles and retention remains strong, but the opportunity is they're spending less with us linked, as I mentioned, to these core franchises, predominantly in lounge and social. And with this group, they've almost all opted in for direct marketing.

So the teams are really focused on our ability to proactively showcase and present the new styles to them as they launch and we'll maintain our in-market activations around community and local, and we're seeing good success on brand awareness, and we'll continue playing that formula.

The next question is from Paul Lejuez with Citi.

Can you maybe talk about the gross pressure from the reciprocal tariffs as well as the de minimis on an annualized basis? And maybe can you just share how much are you relying on pricing as a mitigation tool? And maybe just help me maybe connect the dots between using price, but then also guiding for higher markdowns year-over-year.

Yes. Thanks, Paul. So in terms of 2026, we shared $320 million mitigated impact. We are offsetting about half of the growth within that impact. I would say about half of the offset would be expense actions and the balance would be pricing and vendor negotiations, pricing being a little bit bigger than the vendor negotiation piece. I would say we're being very mindful on a style-by-style basis looking at elasticities.

I don't feel like there's overlap with the markdown pressure we're seeing this year. I think that's really related to -- we have more seasonal inventory than we need based on our sales trend, and we're focused on clearing that by end of year. We definitely have an eye on the relationship between those 2 pieces and feel well positioned today. As I said, we'll keep our eye on pricing as both our pricing rolls out and the performance of that as well as how the competitive environment evolves.

Got it. And then will the pricing changes be isolated to the U.S.? Or do you think you have some pricing power globally that can help as a mitigation tool?

At this point, isolated to...

The next question is from Adrienne Yih with Barclays.

Calvin, I guess my question is on the inventory kind of that's in the pipeline. What can you be doing sort of between now and 2026 when the fixes come into play? How can you kind of chase into things that are suggesting that they're working and make any kind of like course corrections kind of before we get to that point? And then my other question is on the de minimis, and I'm not sure if we have enough information to back into it, but the e-commerce is roughly, let's call it, mid- to high 40% depending on the quarter. A portion of that comes into the U.S. So how should we think about what was being used on the de minimis exemption?

On the inventory, a lot of what I laid out before, the new approach to being able to be quicker, faster has been in place. And although we still have some work and believe we can continue to refine and improve those items that we introduced through the second half of this year that we get a good read on, we'll be able to move quicker than we have in the past.

Some of the new processes I mentioned such as upfront working with vendors on fabrications and having them ready allow us to eliminate up to 2 months through our chase process. So those are in place, and we'll be able to react, and we continue to look at ways in which we can improve that agility even more moving forward.

And then in terms of de minimis, so we fulfill approximately 2/3 of our U.S. e-commerce orders through Canada. Most of those shipments would have been under $800 and would have qualified for the exemption. So it's a meaningful impact for us. I would share that we are looking actively at our DC network and part of our mitigation strategy is inventory placement and making sure we're most efficient as we move forward.

The next question is from Matthew Boss with JPMorgan.

So Calvin, on your revised outlook in both the U.S. and China for the year, could you elaborate on what you saw or how you saw traffic trends progress over the course of the second quarter? And any change so far in the third quarter that informed the more cautious outlook for the year?

Matt, so in terms of KPI trends throughout the quarter, May was our strongest month and July was our weakest. So we did see the trend decelerate as we move through the quarter. We did see store and e-commerce traffic slow a bit as we move throughout the quarter. Conversion was relatively consistent and then AOV flat to slightly worse.

I would share quarter-to-date, the U.S. trend is generally in line with our annual guide. Canada is a little bit lower than our annual guide for the Canada region. And then China is on the higher end. We do expect Q4 China will be on the lower end just given the shift of Chinese New Year out of Q4 and into Q1.

Great. And then, Calvin, could you maybe just elaborate on some of your comments before on changes in the industry that I think you said is challenging your core assortment. And then regionally, I mean, what do you think is different here in the U.S. relative to what you're seeing from the brand overseas?

Thanks, Matt. So from an industry or competitive position, what I'd say is our brand remains strong. Our guests are loyal and our product is uniquely positioned. And as I've said before, there's lots of opportunity for us to keep growing across many categories. Competition in our space has always been intense, and there's lots of share for us to gain. And that said, competition is different today. There are more players across all of specialty, and they're offering athleisure and performance solutions. Our product is uniquely positioned.

And as we continue to drive our unique approach of solving that needs of our guests, when we deliver, we win and continuing to grow our performance apparel this quarter, I think, is a good example of that. And as we've learned and I've shared the opportunity with some of our lounge and social core franchises is a reminder to the team that when we don't and the need for us to continue to create new styles so that we can stay ahead of those that are copying our successes. And we know we can do better for our guests, especially in these categories, and that's the focus.

From a regional perspective, as I shared, our low to mid-value consumers, the newer guest cohorts in the U.S., we continue to see increase in spend. And when I look across international regional markets, we are earlier in our growth, earlier in share, earlier in guest acquisition and our relationship with those guests. So I think the overall assortment continues to resonate and drive our momentum and our international business was strong in the quarter. And all the changes that the team has been in for next year will benefit and serve the entire globe because we know new styles are resonating everywhere. So very positive that, that will just have an impact across all of our markets.

The next question is from Michael Binetti with Evercore.

Just a couple since we're on the international theme. Could you speak a little bit to Canada? I know in previous quarters, you said some of the issues you identified were isolated to the U.S., but your comment on the Canada trend recently. I just wanted to check if you're starting to see some of those issues in Canada or what's causing some slower trends there. And in China, maybe just a thought on where store profitability is today versus prior peak, so we can think about some of the guidance you gave within the context of how that market will affect the margins.

And then I guess, Meghan, I don't want to exhaust this, but as you -- you gave us a lot of components to think about on the margin for 2026 between tariffs and de minimis. But it strikes me as the mix of new product keeps moving higher that usually comes with a placeholder for higher markdowns as well as you don't have as much data on what sell-through will be as you do for legacy products. Is that a fair assumption? Or any other building blocks we should be mindful of that wrap into next year?

Thanks, Michael. I'll quickly go on Canada. We did see similar macro conditions in the Canadian market this quarter regarding some of the consumer uncertainties. And as guests are spending less overall, they are reacting well to new styles and spending less on styles they already have. And I expect the changes we're making in the U.S. will benefit our business across all the important markets, including Canada.

On China, we did see expansion in our operating margin in Q2. I would say in terms of where the growth came from, it was predominantly e-com, while our stores were a little bit more pressured in the quarter. So a little bit of opportunity, I would say, in our stores as we see the traffic there recover. From a margin perspective, we are actively planning 2026. There's 2 components really that are impacting us. So the first is revenue, and we're focused on driving that U.S. inflection. We will see a healthy flow-through on operating margin as we see that business recover.

However, acknowledging, as you mentioned, newness and managing that dynamic, we are going to be very mindful of inventory as we get performance in on the new styles and chase that trend on the upside. So definitely looking to maintain our focus on full price component of our business and managing the markdown piece. And then the second large impact to our business is obviously tariffs and de minimis. So we continue to work on mitigation strategies there and mentioned right now, our expectation is $320 million impact.

And then there'll be some puts and takes as we go through our planning process. There are some pieces of expense that we've pulled up this year that will contemplate add-backs as appropriate and obviously, all with protecting long-term brand health and our potential for the brand.

The last question is from Sharon Zackfia with William Blair.

I was curious, we saw e-commerce outpace retail stores for the first time, I think, since '23 in terms of growth. Are you seeing a change in the way the customer is shopping the brand? Or is that reflective of where you were choosing to do kind of the clearance activity?

Yes. I would say we saw traffic decline slightly in both stores and e-com. We did see a conversion uptick on e-com. I would say a little bit of consumer behavior. And then also we did see higher markdowns in the quarter. We tend to clear those more through our e-commerce channels, so that would be reflective there.

That's all the time we have for questions today. Thank you for joining the call, and have a nice day.